The monetary forecast of a global economic slowdown over the remainder of 2018 is receiving confirmation from shorter-term non-monetary leading indicators.

A March update of the widely-monitored OECD composite leading indicators is scheduled for release on 14 May. Most of the component data, however, are already available, allowing an independent calculation.

The first chart below shows the G7 normalised indicator together with the independently-calculated series, which includes a March estimate and incorporates revisions. The series levelled off in January / February and fell in March. The normalised indicator is designed to signal turning points in the level of output relative to trend, i.e. the March decline suggests future below-trend expansion

The recent reversal in the indicator has been driven by Japan and Europe, with the US component still rising – second chart.

Available evidence suggests that global (i.e. G7 plus E7) six-month industrial output growth reached a seven-year high in March – third chart. Previous posts suggested that a peak would be reached around March, based on a peak in six-month real narrow money growth in June 2017 – the average lead time at turning points historically has been nine months. The chart shows six- and one-month rates of change of a trend-restored G7 plus E7 leading indicator derived from the OECD data. Six-month growth peaked most recently in November 2017; the average historical lead time has been four months, so this is also consistent with a fall in six-month output growth after March. With one-month growth of the indicator still weakening, a further fall in the six-month increase is likely.

The OECD composite leading indicators incorporate a mixture of soft data (business and consumer surveys), hard series (e.g. housing starts / permits, manufacturing new orders, auto registrations / output, average / overtime hours, the ratio of manufacturing inventories to sales) and financial market indicators (e.g. the slope of the yield curve, stock prices). Of the G7 plus E7 countries, only the indicators for Canada and India include a monetary aggregate (M1). The indicators, therefore, provide an independent, though less timely, cross-check of monetary signals.

Previous posts expressed concern that a global economic slowdown during 2018 would be accompanied by a rise in inflationary pressures, constraining central banks’ ability to provide policy support for weakening markets. Recent inflation news provides some support for this view.

G7 headline and core (i.e. ex. food and energy) consumer price inflation rose in March, with the core rate reaching the top of its post-GFC range, matching highs in 2012 and 2016 – see first chart.

The recent core rise has been driven by the US and Japan. The US increase partly reflects the dropping-out of last year’s large cut in mobile data charges. In addition, shelter inflation, which was also a drag in 2017, recovered to a seven-month high in March – shelter has a 41% weight in the core basket and is dominated by actual and imputed rents.

Upward pressure on rents is suggested by the low level of the rental vacancy rate, which fell in the fourth quarter of 2017, with a first-quarter figure to be released tomorrow – second chart.

Shelter inflation has also displayed a lagged relationship historically with house price inflation, which has continued to pick up – third chart.

Our start-of-year commentary suggested that Chinese monetary policy would be eased during the first half of 2018, a development that “could give a further short-term boost to commodity prices, which would add to global inflation concerns”. Evidence continues to build of a policy reversal, with newswires yesterday reporting that an “informed source” expects a further cut in banks’ reserve requirement ratios, following last week’s surprise reduction.

The fourth chart below shows the gap between G7 headline and core inflation along with the annual rate of change of the S&P GSCI commodity price index, with this rate of change projected forward assuming that the GSCI is stable at its current level. The relationship implies a widening of the gap near term, in turn suggesting that headline inflation will move above its February 2017 high, assuming stable core inflation.

Business surveys and equity analysts’ earnings revisions are consistent with a peak in economic growth – fifth chart – but consumer confidence measures remain elevated, giving rise to hopes that a slowdown will be modest and temporary. Higher inflation could contribute to a decline in consumer optimism.

UK inflation numbers have surprised on the downside in the last two releases but, as elsewhere, recent commodity price strength may lift the headline rate near term – sixth chart. As previously discussed, annual unit wage cost growth may have moved up to about 2.75% in the first quarter, while producer output price trends suggest a near-term reacceleration of core consumer prices – seventh chart.