Leading economic indicators
Firstly, let me be clear about the fact that the term, “leading”, in this context does not mean most reliable or most trusted.
Economic indicators are events, factors or statistics which have become associated with a particular economic outcome. For example, rising employment and falling unemployment statistics are associated with economic growth but both lag the actual economic event. Conversely, lead indicators are associated with economic events to come. For example, rising central bank lending rates are in reaction to past economic activity but a long trend of them often indicates an end to a growth phase is in sight.
The difficulty facing forecasters right now is that many of the tried and tested lead indicators are not functioning as they ought in the wake of large-scale use of asset purchase programs by developed world central banks since 2007. Although investment analysts are no longer worried about the scale of quantitative easing, central bank rates remain historically low and this fact suggests the usually useful indicator of rising and high central bank lending rates will not be apparent before the next recession.
Rates of interest paid on tradeable debt securities can be very helpful in judging the relative strength of currencies and the economies using them. So, all eyes are on bond markets in the Eurozone for signs of stress in the Euro. A potential future Italian debt crisis is possible. It has potential to disrupt the Euro and, in the process, topple dozens of European banks but no lead indicators yet suggest any such thing is imminent. The issue of debt and the stagnation of the Italian economy are lead indicators of Euro currency problems to come but the forces of political will appear more than powerful enough to suppress this from becoming a problem for investors over the short to medium term, possibly even longer.
Right now, rates of interest paid on UK bonds are low and getting lower with all the Brexit uncertainty in the air so it appears changes in UK rates will not be telling us anything useful about when we may expect the next slow down in the world economy to occur.
Indicators of German industrial production and business confidence are strong candidates for signalling a Eurozone recession. Germany has become the stalwart of the Eurozone and signs of stress in its economy would be a good lead indicator of recession forces strong enough to pull down the UK economy with it.
What about the USA? All other things being equal, it is most improbable that the US economy will recess before the Presidential election in 2020. Incumbent Presidents standing for re-election do everything they possibly can to forestall a recession to a time after the election for obvious reasons, so we seem to be in the clear from that point of view for a while to come at least.
One thing is certain. A recession is coming, we are definitely getting closer to one, but it appears unlikely until after October 2020.