The “monetarist” forecast here that the global industrial cycle would bottom in autumn 2012 and recover into 2013 receives further support from today’s release of OECD leading indicator data for October. As previously discussed, the OECD fails to extract maximum forecasting value from its indicators. The first chart shows a transformed measure covering the G7 and emerging E7 economies. This measure leads industrial output momentum by three months on average and rose for a fourth successive month in October, implying that the incipient global pick-up will extend through January at a minimum.

The second chart shows, additionally, a “leading indicator of the leading indicator”, designed to signal turning points even further in advance – its average lead at peaks and troughs is five months. This fell slightly in October, breaking a run of five consecutive gains and suggesting that a rebound in global industrial growth will peak out around February. The measure, however, is especially sensitive to data revisions and the modest October loss could be revised away.

The bias here is to play down the fall in the double-lead indicator since it is not supported by monetary data. Global six-month real narrow money growth continued to strengthen in October, reaching its highest level since December 2011 – third chart. Real money has an average lead time to industrial output of six months so usually – though not always – turns before the double-lead indicator. A “monetarist” forecast, therefore, is that the global economy will accelerate into next spring, at least.

Importantly, the October increase in the global leading indicator reflects broad-based improvement across countries. Eurozone economic weakness, in particular, should abate, with the regional indicator rising for a third month, consistent with a revival in real narrow money since the spring – fourth chart. The relative optimism about Eurozone prospects held here is also supported by recent firmer survey evidence, including today’s Sentix results for December, which suggest further recoveries in the Ifo and PMI measures – fifth chart.

The global upswing is unlikely to be derailed by US fiscal tightening in 2013, which an eventual budget deal may restrict to 2% of GDP or less. Assuming a Keynesian multiplier of 0.5 (the IMF’s claim to have uncovered a much larger number does not withstand scrutiny), a 2% package would cut US growth by 1 percentage point in 2013 and world expansion* by 0.2 of a point – modest relative to the probable boost from current expansionary monetary conditions.

*IMF measure based on purchasing power parity. US weight in 2011 = 19.1%.