The road to recovery is much longer than it needs to be
The OECD’s latest Composite Leading Indicators tell us two things; firstly that the world economy is possibly on the verge of a tentative recovery. Second, that we could learn a lot from the USA. Let’s start with the good news: the Organisation’s verdict for the OECD as a whole is that these monthly indicators, specifically chosen to give us an idea of when economies are at a turning point, “continue pointing to a positive change in momentum”. The USA and Japan are leading this trend, but
stronger, albeit tentative, signals are beginning to emerge within all other major OECD economies and the Euro area as a whole.
What about the impact of austerity? Like many people, I would regard the US as less austere than us and the Euro area; that makes it interesting to compare the UK with the other two over the past couple of years. In the chart below, 100 represents the long-term economic trend and the key thing to look out for is when the CLIs change direction – the OECD believes that
Turning points of CLIs tend to precede turning points in economic activity relative to long-term trend by approximately six months.
All three economies seem to have reached an upturn, but this is much clearer for the USA than the UK or the Euro Area and it began earlier. I’d regard this as evidence to support David Blanchflower’s claim on the Today programme this morning that austerity is holding back the UK, when compared with the US. As for Howard Davies’s counter-argument that we’re slower off the mark because the UK is in a “bad neighbourhood” – too close to the Euro area – look at the chart again: the UK went into the down swing before the Euro area and right now our paths are almost identical.