Global slowdown already in the numbers

Written by Stephen Poloz

It is no wonder that many are skeptical of forecasts that the global economy will slow in 2006, what with unemployment at its lowest levels in decades and interest rates on the rise. But the numbers are clearly beginning to paint a slower growth picture.

Ironically, the most widely-quoted economic indicators are among the worst forecasters of the future. GDP growth is the most comprehensive economic statistic available, but it is published with a long lag. We now have data on global economic growth only until the middle of 2005, and until the third quarter for the largest economies. But to an economic forecaster, that is ancient history — to look ahead, we need to examine less comprehensive but more current indicators.

A widely-quoted monthly economic indicator is employment. But employment (and the related unemployment rate) tends to be a lagging indicator of economic growth, not leading. The reason is that when the economy picks up speed, companies are not sure whether it is for real, so they ask their employees to work overtime and only hire more workers when they are certain. When a slowdown arrives, they hesitate to lay workers off until they are sure.

But what do the more informative indicators tell us? Consider the leading economic indicator constructed by the OECD for its 30 member economies. The index is based on selected monthly economic statistics, each weighted according to its ability to forecast GDP. It peaked at 6% growth in May 2004, but then decelerated for the next 12 months. It has picked up slightly to around 2% growth recently, but is clearly pointing to much slower growth in 2006. Industrial production for the OECD area has already slowed to about 2% from over 5% in early 2004.

Consider the Australian dollar, which follows the global business cycle and, unlike the Canadian dollar, is not being distorted by high energy prices. The Australian dollar rose from around 50 U.S. cents in late-2001 to nearly 80 cents in early 2004. It faltered back to 70 cents during 2004, rallied to 80 cents again in early 2005, and has been edging lower for the past several months.

Consider China, the world’s growth locomotive. Although recent GDP statistics suggest that China’s economy is still growing rapidly, the monthly indicators are easing. Comparing growth in the first ten months of this year to the same ten months in 2004, growth in urban fixed asset investment has slowed from 43% to 28%, and import growth has slowed from over 36% to 17%.

And then there is the U.S., whose leading economic indicator has slowed from nearly 10% growth in the first half of 2004 to about 2% growth in the past six months. In particular, the housing boom is clearly getting long in the tooth, and slower or even zero growth in that sector is in store for next year. Other consumer spending is likely to moderate in concert with housing.

The bottom line? The economic tea leaves are rarely clear-cut. A rebound in the world economy is possible, in which case central banks would act more forcibly to moderate things. But these short-term indicators are usually pretty reliable, and they are pointing to slower growth ahead.

The views expressed here are those of the author, and not necessarily of Export Development Canada.

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