Leading Indicators indicate future changes in the business cycle of the economy. In other words, they give a signal as to whether the economy is starting to turn up or slow down, before the data received from economic reports confirm these changes. Forward indicators are often considered more significant than lagging indicators (e.g. GDP) because they give an early warning of impending changes in the economy. Historically, they have done quite well in predicting the economic situation for the next few quarters, but nevertheless their limitations and potential for error must be taken into account. What could we learn from the latest readings?
What is the OECD index (CLI)?
The Organisation for Economic Co-operation and Development (OECD) has 38 member countries, including most of the world's developed countries, such as: USA, Canada, Japan, France, Germany or the UK.
The Composite Leading Indicator (CLI) is an economic indicator used to predict changes in the business cycle of the economy. Its value could indicate changes in future economic trends. The CLI is developed by the Organisation for Economic Co-operation and Development (OECD) and is based on economic data: industrial production, retail sales, consumer confidence indicators (CCI) and producer confidence indicators (BCI), as well as equity and foreign investment indices. For example, an index value of 100 points represents the long-term average for a given market.
CLI readings for the G20 countries in February fell for the 20th consecutive month and reached their lowest level in 31 months. However, the decline is becoming smaller month by month, which may indicate a gradual fading of the negative trend in OECD economic data and suggest a possible future rebound. The value of the index is currently more in line with the slowdown associated with the 2000 tech company bubble than the 2008 property crisis.
Source: OECD data, CLI G20
28% of the countries surveyed reported an increase in this indicator on a month-on-month basis. This is an improvement on 22% in the previous reading. From May to October last year, none of the countries surveyed showed an increase in this indicator. It seems that this may be a harbinger of the end of the global slowdown.
Source: Self analysis, OECD data
For which countries is the OECD index (CLI) growing the most?
The CLI index is growing strongest for the German economy. This is the third month of growth in this indicator for the country, which could have a positive impact on the German DAX index (DE40).
Source: Conotoxia MT5, DE40, Daily
Source: OECD data, CLI, Germany
In second place in terms of the m/m increase of this indicator is the Italian economy. Like Germany, it is recording the third consecutive month of growth in this indicator. It seems that we could therefore expect an increase in the value of the Ishares Msci Italy ETF (EWI).
Source: Conotoxia MT5, EWI, Daily
Source: OECD data, CLI, Italy
The last economy on the podium in terms of growth in the OECD leading indicator is the UK. For this reason, the UK100 index of the country's 100 largest companies may still seem attractive.
Source: OECD data, CLI, United Kingdom
Source: Conotoxia MT5, UK100
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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