The global longer leading indicator* tracked here continued to firm in November, suggesting that a recent recovery in industrial output growth will be sustained through spring 2015.

The indicator is giving a more hopeful message than a year ago. The first chart shows the position at end-2013. Global growth – as measured by the six-month change in output in 14 large economies – had reached its highest level since October 2011, contributing to widespread optimism about 2014 prospects. The leading indicator, however, had fallen significantly from a peak in July 2013, suggesting an economic slowdown during the first half of 2014.
 

The second chart shows the current position. Global growth moved lower from January 2014, bottoming in August before recovering through November. The leading indicator, meanwhile, revived in early 2014 and has continued to rise recently.

 

Economic uncertainty has been heightened by a 44% plunge in the oil price, as measured by spot Brent, between June and December 2014. Some commentators argue that this weakness is a negative signal for the global economy. The table documents changes in global growth six and 12 months after previous large oil price declines. The six-month results are mixed but growth was higher in all five cases after 12 months.

A lower oil price transfers income from exporters to importers.  Assuming that importers’ marginal propensity to consume / invest is higher, this transfer should boost growth. In the short run, however, exporters may cut spending more quickly than importers raise it, resulting in a neutral or negative impact. The table suggests that positive effects dominate after 12 months.

*The indicator combines a large number of forward-looking data series and leads cycle turning points by about six months. The November reading incorporates December data where available in the calculation of trends in the components.

The annual change in Eurozone consumer prices dropped to -0.2% in December from 0.3% in November, with the negative reading reflecting falls in energy and unprocessed food prices. Excluding these categories, prices rose by an annual 0.7%, unchanged from November. A narrower “core” inflation measure excluding energy, food, alcohol and tobacco firmed to 0.8%, above its level at end-2013 – see first chart.

Core inflation is unacceptably weak but the ECB has already reacted, cutting official rates in June and September, offering cheap long-term funding for bank lending and embarking on QE focused on private-sector securities. Monetary policy affects the economy with a six to 12 month lag and inflation after about two years. Monetary trends provide early evidence about its effectiveness. Six-month growth in Eurozone narrow money M1 rose from 4.1% annualised in May, before the ECB’s first rate cut, to 9.9% in November. Broad money M3 growth increased from 1.0% to 5.3% over the same period. The euro’s effective exchange rate, meanwhile, has fallen by 4% since mid-2014.

The economic definition of “deflation” is a pervasive and persistent decline in prices associated with sustained money and credit weakness. The Eurozone isn’t in deflation currently and the risk of it entering such a scenario has diminished.

German releases today were encouraging, with the level of unemployment falling to a 23-year low in December, unfilled vacancies at a new record and retail sales volume rising by a solid 1.0% in November (although monthly changes are notoriously volatile). The German economy is effectively at full employment: the unemployment rate stood at 5.0% in November versus 5.8% in the US and 6.0% in the UK in the three months to October – second chart.