A Prelude to Possible Armageddon

'Be forward-looking'. Right now, I'd rather not. And that's not only cowardice speaking, but a claim that in times like these, the blazing inferno of our forthcoming possible catastrophes is at the very least likely to blind us to our present actual condition.  Today, and tomorrow, if I have time, I intend to look back - to establish at least where we stand, even if several of our paths onwards lead over the precipice.

What present itself in the data - even up to May and June data - is the sheer buoyant health of the world economy, and its sheer normality. Let's remember what's actually happening in world trade, and what's happening to world demand.

First, the link between G3 demand and NE Asian exports is as tight as it has ever been, and, what's more, so far as we can tell, both have been interruptedly buoyant now since the middle of 2009.  Looking at G3 import data in dollar terms, by May US imports were rising 20.7% YoY, Eurozone imports were up 32.6% YoY, and Japan's imports were up 27.5% YoY. Overall, then, G3 imports were growing 26.9% YoY. What's more, sequential momentum remained positive, with the MoM growth in the three months to May rising 0.8 SDs faster than the historic seasonalized average, and the 6m of this momentum indicator riding at 0.92 SDs.  This is not immediately signalling the developed world economy is dangerously anaemic.

And, of course, NE Asia's exports machine is answer the call: by May NE Asia's exports were growing 14.8% YoY (China up 19.3%, Korea up 22.4%, Taiwan up 9.5%, and even Japan  managed a 1.8% YoY rise, despite the worst that earthquakes/tsunamis/nuclear accidents could throw at them. By June, my best guess is that NE Asian YoY export growth will come in again around the same (China up 17.9%, Korea up 13.6%, Taiwan up 10.8% and, based on the first 20 days, Japan up 9.2%). As the chart below shows, there's been a downward inflection in the 6m momentum trendline, but we're still ranging deep in positive territory.  And that's despite the multiple catastrophes suffered in the region's second-largest industrial economy.

Up to May and June, then, if you had to choose a description of the world economy judging from its trade data, it would be fair to use words like buoyant, or - if you're determined to be a grizzled pessimist - steady.

So it should be no surprise that you'd probably end up using much the same vocabulary if you looked at domestic demand data.  A word about how I do this. In each country, I look at what I consider to be the obvious monthly data-points for domestic demand: retail sales; auto sales; labour markets (employment and wages); construction and, where possible, service industries activity.  For each of these indicators, I develop the seasonalized historic expectation and measure monthly deviations from that pattern, expressed in terms of standard deviations.  For each country, I will then take a flat average of those deviations. When looking across countries (ie, for NE Asia, or for Europe, or for the world) I weight according to a 5yr average of dollar GDPs.

Here's how the situation looks up to May:

This ought to ring some bells: momentum accelerating throughout 4Q10 and 1Q11, followed by a sharp fall-off in April and May, with the beginnings of a recovery visible in June (probably - we've only partial data so far).  On a 6m trend basis, we have the same thing we saw in the trade data: an inflection point downwards in April, but still defiantly positive underlying sequential momentum. (Details: for 6m to June, the US is up 0.49; Europe is up 0.21; and NE Asia is up 0.05. For June itself, the relative strengths (on the data we have) are almost exactly reversed - ie NE Asia is up 0.78; Europe up 0.13; US down 0.26). 

Once again, one would conclude from this data that although the world economy's future may turn out to be catastrophic for several popularly identifiable reasons, its OK so far. (As the man said as he flew past the 30th floor window on the way down.)

Naturally enough, when an economist goes to the considerable trouble of constructing these indicators, he likes to use them to get a quick grab on likely GDP growth.  In the case of this demand model, the newly-normalized model (yes, shameless, I know) runs to an r-squared of 0.9 over the last 12 years when regressed against the IMF's global GDP result.  Last year, the IMF says the world economy grew by 5.01%, whilst this demand indicator suggested 5.2%. This year again, it's again telling us to expect the world will grow by around 5.2%. 

Unless, of course, the immediate future is dreadful.  Which it might be - it demands no highly-developed imaginative powers to envision it.  But as you ponder the possible trajectories, do at least remember that for all the analytical ink spilled, and for all the weaknesses already printed in the world's data, during 1H 2011 the world was growing quite nicely at a clip of around 5%.