OECD leading indicators point to coming slowdown

Within this doom-and-gloom portrait of the global economy, however, there are signs that things may be turning around. The OECD leading indicators for South Korea (see chart below) stabilised in December and may turn around in January as the country moves into the recovery phase of the business cycle (below trend growth but accelerating growth).

Why focus on South Korea? Well, over the past 20 years South Korea’s economy has reliably turned before any other country; its economy is ultra-cyclical due to its automobile, semiconductor, and shipbuilding industries on top of deep export connections to China which, again, is a key component of the global export economy.

We need to beware of false signals, though: look at early 2011 when the world was digesting the Greek crisis. South Korea’s economy was slowing down after the massive rebound in the wake of the great financial crisis. Around early 2011, the slowdown stabilised with growth rates still firmly above recent trend. The leading indicators even turned higher... but then the effects of the Greek crisis spread to all of Europe and it became a euro crisis.

Subsequently, South Korea’s leading indicators turned sharply lower and went below trend growth (index 100) during the year. Note how the country’s leading indicators were already accelerating in early 2012 around six months before European Central Bank president Mario Draghi’s famous “whatever it takes” comment, which many believe to have saved the economy.