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US, China to slow down

Camille Accad/Analysis
Filed on July 14, 2015
A production line at the headquarters of messenger bag manufacturer Timbuk2 in San Francisco.

(Bloomberg)

India and South Korea are brightest spots in emerging Asia

The world economy has been on a path of deceleration in the past 12 months, but at the country level, economies have experienced a variety of trends. Growth in developed countries has been sluggish, despite the US labour market showing some signs of recovery and the eurozone economy stabilising.

In emerging Asia, China has been on a gradual slowdown while India is in recovery following years of lacklustre growth. The rest of emerging Asia did not experience a clear trend in growth either, but from the major economies, only South Korea and Hong Kong witnessed a notable decline in economic growth. As a whole, emerging Asia continued to grow at a much faster pace than developed markets.

The Organisation for Economic Cooperation and Development, or OECD, publishes on a monthly basis the composite leading indicators, or CLI, for a number of countries, primarily OECD members, as well as a selection of non-OECD countries such as China, India and Indonesia.

The CLI aims at providing early signals of changes in economic trends, between six and nine months in advance.

The CLI's most important characteristic includes its ability to predict turning points in business cycles, in other words the pace of economic activity relative to its long-term potential. Key indicators used in the CLI include orders and inventory changes, financial market indicators and business confidence surveys.

Earlier releases of the CLI have correctly predicted most countries' economic performances, best depicted by gross domestic product. China and India's diverging trends were captured clearly in the CLI six to nine months in advance, as well as the deceleration in South Korea and G7 economies.

The US and the eurozone account for the bulk of the G7, and the OECD's indicator showed six to nine months in advance that US output would stabilise and the eurozone economy would stop decelerating. The CLI figures have changed since then.

Eurozone pick-up

According to the OECD, developed economies will maintain their sluggish run and slow further, mainly due to a slowdown in the US. The leading indicators show that after a few more months of stability, the US economy will cool down. However, eurozone output is expected to pick up again. The eurozone economy is already growing at a steady pace, and the European Central Bank's unprecedented monetary stimulus should maintain the bloc's recovery.

In Asia, China's economic activity is expected to continue softening further in the next three quarters. The combination of declining property prices over the last year and a sharp slowdown in industrial output and investment activity coupled with the numerous policy easing measures is consistent with the soft declaration expected.

The CLI also shows the Indian economy maintaining its acceleration. Recent activity in investments - a key element of the economy that was missing and dragging growth downwards in the last few years - suggests that the OECD's projections will likely materialise in the next two to three quarters. In the other two emerging Asian economies assessed by the OECD, South Korea is expected to recover following more than one year of slowdown while Indonesia will soon begin to cool down.

The key highlight of the CLI data is the upcoming change in business cycles in the eurozone and the US. The resurgence of the Indian economy and the ongoing Chinese slowdown are in line with consensus. If these projections are accurate, then, in the case of the US, the Federal Reserve may have to postpone its rate hike to next year. Similarly, the slowdown in China, if materialised, will probably lead to further monetary easing.

However, inflation is an important factor that may affect these monetary policy projections. With inflation expected to rebound in the second half of the year, due to the oil price base effect and its increase in value in 2015, monetary policy actions will continue to be difficult to predict.

The writer is an economist at Asiya Investments Company. Views expressed are her own and do not reflect the newspaper's policy.


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