World Economy: moderate pace of growth in the coming months

Monthly leading indicators from the OECD, published December 8, let believe that economic growth will stabilise in the coming months, especially in the OECD area. The euro zone and Japan remain the exceptions with, at best, slow growth. Emerging economies will keep growing, but at a slower pace than what we were accustomed to.

Link to the OECD press release:

http://www.oecd.org/std/leading-indicators/composite-leading-indicators-cli-oecd-december-2014.htm

Recession Indicators

Analysts and journalists that comment or report economic news, be they or not economists, conclude, often and automatically, that there is a recession when an economy real GDP contracts two consecutive quarters. Also, when politicians are asked: what is the definition of a recession? Frequently, their staff recommends them to answer: it is at least two consecutive quarters of real GDP contraction.

So, why a recession in Canada lasted only one quarter (first quarter of 1975), and why the most recent recession in the United States (December 2007 to June 2009) started without having two consecutive quarters of real GDP decline during the first half of 2008?

The answer: organizations that have the responsibility of dating business cycles use not only real GDP but also other macroeconomic indicators to make their decisions.

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee looks at real GDP, real income, employment, industrial production, wholesale trade, retail sales and any other indicator that, depending on the circumstances, could guide its judgment of the occurrence of a recession in the United States.[1] 

The Centre for Economic Policy Research (CEPR) Business Cycle Dating Committee, which has responsibility for dating recessions in the euro area, uses also a set of indicators related to production and labor market, such as real GDP, employment, investment, industrial production and consumption.[2]

The C. D. Howe Institute Business Cycle Council retains real GDP and employment to identify recessions in Canada. The Institute took this responsibility in 2012 after Statistics Canada decided to cease the dating of the country’s business cycles.[3] 

In Japan, the Economic and Social Research Institute (ESRI) Business Cycle Indicators Committee analyses many coincident indicators, such as industrial production, retail sales and wholesale trade. After that, ESRI’s President renders a decision as to the occurrence of a recession.

 

Those four organizations insist on the importance of looking not only at the duration, but also at the amplitude and the scope (degree of propagation to the whole economy) of the downturn in economic activity to determine the occurrence of a recession.

The Conference Board does not play an official role in dating recessions. But, it employs real GDP and its index of coincident indicators to identify recessions for many countries. The coincident variables are, most often, employment, industrial production and retail sales. The Economic Cycle Research Institute examines also business cycles for different countries, and it uses the NBER method to determine recessions.

For Quebec’s economy, Desjardins’ economists identified recessions by uniquely using real GDP. But in a note to their analysis, they mentioned:

“…two or more consecutive quarters of declines by the real GDP do not necessarily signify a recession. A major pullback in economic activity for the period also has to be recorded. If the drop is weak in scope, it could denote a slowdown phase.”[4]

 

For the world economy global business cycles, International Monetary Fund (IMF) economists use, as key indicator of a recession, world real GDP per capita based on purchasing power parity (PPP) weights. They also look at industrial production, total trade, capital flows, oil consumption, unemployment, per capita consumption and per capita investment.[5]

 

Also, a weakness of the two consecutive quarter approach is that when there are revisions of data, a small quarterly decrease can become a small increase. What happens, after the revision, of the recession call made on the basis of preliminary data? It is forgotten or ignored.

Even if the two quarter approach would have advantages, such as being simple, easy to explain, automatic and popular, the business cycle experts refute it. They prefer to exercise their judgment after having used a certain number of  indicators and criteria (duration, amplitude and scope).

 
 

Finally, where does come from this idea or belief that two consecutive quarters of real GDP contraction equals a recession?

It seems that it originates from an erroneous interpretation of a NBER statistical observation, during the 1960s, to the effect that recessions in the Unites States lasted at least six months.[6]

To conclude, taking inspiration from the NBER, CEPR and C.D. Howe Institute experts, wouldn’t it be more appropriate to suggest to politicians, and their staff, the following answer to a question on the definition of a recession:

-      It is a significant decline of the activity, propagated to the whole economy, lasting at least a few months.
 

N.B.: The French version of this article is available at: http://leblogdejpfsurlesindicateursavances.blogspot.ca/2014/09/pib-et-recession.html

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[1] For more information, consult the most recent decision of the NBER Business Cycle Dating Committee and its Q&A section at:

http://www.nber.org/cycles.html

[2] The CEPR committee presents its decisions and methodology at: http://www.cepr.org/content/euro-area-business-cycle-dating-committee

[3] Cross, Philip and Philippe Bergevin. “Turning Points: Business Cycles in Canada since 1926”. C.D. Howe Institute. October 2012. Available at: https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_366_0.pdf

[4]  Bégin, Hélène and Jonathan Créchet. “New Features for the Desjardins Leading Index”. Desjardins Economic Studies. January 2013. Available at: http://www.desjardins.com/en/a_propos/etudes_economiques/actualites/point_vue_economique/pv011613a.pdf

[5] IMF, “World Economic Outlook”,  April 2009, Box 1.1 « Global Business Cycles », pages 11 to 14. Available at: http://www.imf.org/external/pubs/ft/weo/2009/01/#ch1box

[6]  Cross and Bergevin, page 4 :

“The notion that a recession is defined by two or more consecutive quarterly declines in GDP has become well entrenched in popular discussions. The origins of the consecutive-declines guideline go back to a mistaken interpretation of a simple statistical observation by the NBER that, in practice, recessions in the United States lasted at least six months (Moore 1967). Lay people, anxious to penetrate the byzantine process used at the time to assess cycles, quickly jumped on this as a rule even though it was just a statistical artifact. Indeed, the NBER itself has never used consecutive quarterly declines in GDP as a definition of a recession.”

 

 

Quebec economy: better outlook

Desjardins Leading Index (DLI) increased significantly for a fifth month in a row in September, according to the information published by that financial institution on November 21. This index points to a better outlook for the Quebec economy in the coming months.

Desjardins' economists forecast a GDP growth of 1.8% in Quebec in 2015, an improvement from this year (1.5% projected) and last year (1,0%). Will that be enough to see positive changes in the labor market?

Link to DLI analysis:   

http://www.desjardins.com/ressources/pdf/ipd1114e.pdf?resVer=1416577260000

World Economy: Slower Rate of Expansion

The world economy continues to expand, but at a slower pace. This is what we can read from the most recent J.P.Morgan Global Manufacturing & Services PMI results published November 5 by Markit Economics.

Link to the Markit press release:

http://www.markiteconomics.com/Survey/PressRelease.mvc/7de72a0e9c894224992372cd912bebe2

World economy: stable and moderate growth in the OECD area

The OECD monthly leading indicators of the evolution of the economy show a pattern of  stable and moderate growth in the coming months. The main exceptions are the euro area and Japan where the short term outlook is to growth weakening. The most recent data on leading indicators were published October 8 at : 

http://www.oecd.org/std/leading-indicators/CLI-Oct14.pdf

On October 7, the IMF published its World Economic Outlook and its forecats are not different from what we can read from the OECD leading indicators. The world output will grow by only 3.3% this year, below trend, and 3.8% next year, according to the IMF.

http://www.imf.org/external/pubs/ft/weo/2014/02/

World Economy: moderate growth

The expansion of the world economy continues at a moderate pace. This is what we can deduct from the latest monthly edition of the J.P. Morgan Global Manufacturing & services PMI, published October 3 by Markit Economics. Manufacturing and services industries contribute to growth, according to the purchasing managers consulted around the world.

Link to Markit Economics press release :

http://www.markiteconomics.com/Survey/PressRelease.mvc/f9fa304d4f7948649dec41faf0ffe0e5

The IMF will soon publish its World Economic Outlook update. It will give us its most recent assessment of the economic situation and its forecasts for 2015.

World Economy: Signs of Solid Growth?

Monthly Leading Indicators, published July 8 by the OECD, «...continue to point to stable growth momentum in the OECD area». Growth should be above trend in advanced economies in the coming months. Better prospects are anticipated for China and India based also on the OECD composite leading indicators for those countries.

Details
http://www.oecd.org/std/leading-indicators/CLI-July14.pdf

The J.P. Morgan Global Manufacturing & Services PMI, published July 3 by Markit Economics, also shows positive signs for the world economy. Signs of improvements are also present for emerging economies in the PMI.

Details
July 3
http://www.markiteconomics.com/Survey/PressRelease.mvc/f4caa5bd611d4a568ab1a28c8f2816a5
July 7
http://www.markiteconomics.com/Survey/PressRelease.mvc/334c78cd9bb8449484028c652203c1c8


In the coming days, the IMF and the Bank of Canada will publish an update of their forecasts for the world economy. Let's see what will be their assessment of the economic outlook for the coming quarters.

Weak growth in Quebec in the coming months

Desjardins Leading Index (DLI) for Quebec's economy points to weak growth in the coming months. The DLI increased only by 0.2% in both April and March and by 0.3% in February, according to the data and the analysis published June 12.

Quebec Government Budget tabled June 4 is based on real GDP growth of 1.8% in 2014. It might be quite difficult to achieve. In the first two months of this year, Quebec GDP was 1.4 % higher than during the corresponding period of 2013, according to the Institut de la statistique du Québec.

For details about the DLI go to :

http://www.desjardins.com/ressources/pdf/ipd0614e.pdf?resVer=1402579016000

OECD leading indicators, May 2014

The OECD published May 13 its monthly data on composite leading indicators. They show that OECD countries will have, in the coming months, a stable and moderate growth. But major emerging economies, notably China, India and Brazil, will register a significant slowdown.

Details at : http://www.oecd.org/std/leading-indicators/CLI-May14.pdf

China : growth will continue, but at a slower pace in the coming months

The Conference Board leading economic index for China shows that its production of goods and services will keep expanding in the coming months, but at a slightly slower pace.

http://www.conference-board.org/data/bcicountry.cfm?cid=11

The latest Flash PMI data from Markit indicate that the manufacturing sector keeps registering a slowdown of its growth.

http://www.markiteconomics.com/Survey/PressRelease.mvc/b6e487b86c1a4ec48044fb9e79b0e282

United States : moderate growth in the coming months

The Conference Board leading economic index recent evolution points towards a moderate growth for the american economy in the coming months. The most recent data are the February ones, and they were published March 20.

Details :   http://www.conference-board.org/data/bcicountry.cfm?cid=1

World Economy : Forecast Update

In early February, the Conference Board (CB) revised upward its projection for the world economy in 2014. It now predicts that real GDP will grow by 3.5% this year. Last November, its forecast was 3.1 %.

The new CB projection is slightly lower than those published by the IMF and the World Bank in January; both expect a growth of 3.7% this year.

Details at :     http://www.conference-board.org/data/globaloutlook.cfm

Euro zone : the outlook continues to improve

The index of leading indicators of the evolution of euro zone economy increased again in December according to the data and the analysis published January 28 by the Conference Board.

Details at : http://www.conference-board.org/data/bcicountry.cfm?cid=10

February 5 update : The PMI from Markit Economics show that the eurozone economy kept improving in January. 

Details at : http://www.markiteconomics.com/Survey/PressRelease.mvc/8234c73e83714049a57e79337b91f438

American Economy : Sustained Growth

The Chicago Fed National Activity Index, based on 85 monthly indicators, shows that the US economy grew at a pace slightly higher than the trend during the last quarter of 2013.

http://www.chicagofed.org/digital_assets/publications/cfnai/2014/cfnai_january2014.pdf

The monthly and semi-annual evolution of the Conference Board leading economic index points towards a sustained growth in the coming months.

http://www.conference-board.org/data/bcicountry.cfm?cid=1

Many forecasters (IMF, World Bank, Conference Board, etc.) anticipate that the US GDP will grow by around 3% this year, compared to close to 2% in 2013.

Big Mac Index : the canadian dollar overvalued in January 2014

According to the Big Mac Index published by The Economist, the canadian dollar is overvalued, compared to the US dollar, by 8.4 % in January 2014.

Details at : http://www.economist.com/content/big-mac-index

IMF- World Economic Outlook Update

Here is a good summary of the IMF World Economic Outlook Update published January 21 :

Better growth prospects in the OECD area

The OECD leading indicators, published January 13, point to a more rapid pace of growth in many countries of the OECD area.

Details at : http://www.oecd.org/std/leading-indicators/compositeleadingindicatorsclioecdjanuary2014.htm

Canadian economy : modest growth in the coming months

The leading indicators of the canadian economy show that its growth will be modest in the months to come. This is what we can interpret from the publication on January 6 of the Macdonald-Laurier Institute press release on the recent evolution of its index of leading indicators.

Details at : http://www.macdonaldlaurier.ca/biggest-us-advance-in-years-drives-mli-leading-economic-indicator-up-0-3-in-november/

The manufacturing sector should contribute moderatly to the growth of the whole economy based on the recent evolution of the RBC PMI published January 2 on the Internet site of Markit Economics.

Details at : http://www.markiteconomics.com/Public/Page.mvc/PressReleases

The Bank of Canada Report on Monetary Policy, to be published January 22, will give us a more complete overview on the state of the canadian economy and the Bank's projections for the coming quarters. Watch for questions on the absence of inflationary pressures and the possibility of deflation.

World economy : moderate rate of expansion

The world economy keeps expanding at a moderate rate. This is what the JPMorgan Global Manufacturing & Services PMI suggests. The evolution of the new orders subindex shows that this trend will continue in the coming months. The most recent monthly data and analysis were published January 6 on the Internet site of Markit Economics.

Details at : http://www.markiteconomics.com/Survey/PressRelease.mvc/ebfdf95d51b2401aae0936330ea3bd7e

World manufacturing sector keeps expanding

According to Markit's PMI, the world manufacturing activity was expanding at a healthy rate in December. The evolution of the new order subindex shows that growth will continue in that sector in the near future.
 
Details at :
http://www.markit.com/assets/en/docs/commentary/markit-economics/2014/jan/Global_PMI_manu_14_01_02.pdf