January 20, 2022
Similar to the U.S. Leading Economic Index (LEI) from the Conference Board, we believe global leading indicators can provide useful insight into where economies around the world may be headed in the near term. Specifically, we track the global Composite Leading Indicators (CLI) from the OECD. The latest data for December was released on January 17.
As you can see in our LPL Chart of the Day, leading indicators moderated slightly overall in December. Europe stands out with higher overall levels, but nearly all major economies around the world saw their growth outlooks slow at the end of last year and the post-pandemic growth peak has likely passed.
The good news here is that the 100.5 number for the total global OECD CLI is consistent with the solid overall economic growth we expect in the near term (these indicators look out six to nine months). Maturing expansions slow so this is normal and to be expected. Beyond that, the month-over-month dip was only 0.1 (from 100.6 to 100.5), while much of Europe and Japan were over the 100 level.
“The global growth trajectory moderated in December in large part due to Omicron,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “Global leading indicators do however show some relative stability in the United States and Europe, though the outlook for China’s economy has weakened further.”
To get a better sense of momentum in these leading indicators, we also like to look at the six-month change, as we’ve done in the chart below. There you can see that the strongest momentum is found in Europe, despite ongoing challenges managing the pandemic. Economies in India and Japan have been hanging in there relatively well, while China has been a big outlier to the downside.
The pronounced weakness in China over this time period makes sense as it captures both the effects of the government’s regulatory crackdown and debt crisis among property developers, both key factors in the underperformance of emerging market equities during the second half of 2021, as well as their authoritarian zero-COVID policy that has led to periodic strict lockdowns in some major cities.
For the United States, capturing the hits from the Delta and Omicron variants during this six-month period led to a 0.4 point drop in its CLI, bigger than the 0.24 drop in the overall global reading during the same period. We maintain our 4 to 4.5% forecast for U.S. gross domestic product (GDP) growth in 2022 while acknowledging slight risk to the downside.
So what does this mean for investors? First, we continue to recommend investors focus their regional allocations on the United States among developed markets, though the market’s increasing interest in value-style stocks and the relatively similar economic growth outlooks in Europe and the United States have increased the attractiveness of developed international equities. Moreover, the U.S. dollar has started to roll over which has helped recent international performance. We maintain our neutral view of developed international for now while considering a more positive view.
We maintain our negative view of emerging markets due primarily to the slowing Chinese economy. Regulatory risks remain but have begun to diminish.
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All index and market data from FactSet and MarketWatch.
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