Global industrial activity is starting to accelerate in line with the improvement of the leading indictors. Furthermore, most of these indicators suggest there is more improvement to come. That said, these statistics are not foolproof and it will pay to keep watch that actual activity sticks to the expected improving path.
Global IP lifted to 2.6%YoY in August and will probably be over 3.5% by the end of this year. The big driver of this improvement so far has been the stabilisation in activity in Europe and Japan, which are now making a much smaller, negative contribution to growth.
With the US improving and the China driving gains in emerging markets, the level of activity is starting to rise more quickly. Growth is likely to be pretty strong given we are starting to lap the weak comparison period of Sept-Dec of 2012, when European and Japanese activity fell fairly aggressively. But looking through these weak comps, there has been an underlying improvement in activity.
This has yet to flow through to meaningfully stronger trade activity, although that is not usual given the lags between leading indicators and trade, with this relationship shown on the chart on the left.
Indeed, the most recent Chinese trade data, which is not included in these aggregate data, surprised to the upside, albeit to still modest growth rates.
The latest round of OECD leading indicators continued the recent trends at a headline level, with MoM momentum still good.
That said, there are some relatively unusual trends in the detail. For example, the US index shows some signs of waning momentum, while the European index is still rising pretty strongly.
This is fairly curious given the most recent GDP data, which these indices are designed to follow. Indeed, if anything, the reality seems to be the opposite, with Europe struggling to find growth out of the most recent recession and the US travelling relatively well.
Looking more at emerging markets, it appears that some countries will be more vulnerable than others when tapering of asset purchases by the FOMC becomes a reality, which is increasingly looking to be in the not too distant future.
In particular, the Indian leading indicator continues to crash, while the Brazil Index is showing signs of stabilisation. This is also apparent in relative currency performance.
As mentioned before, the China leading indicator actual appears to be coincident or even lag industrial production, so I don't think there is too much to be gleaned from this number.
But more generally, Chinese activity looks to have pretty good momentum into year-end. That said, we may be getting to a point where it is too good, especially for some of the commodity-intensive industries which are currently way ahead of expectations, like steel.
