Leading indicators strengthen after crisis in all major economies

Household incomes less impacted than GDP

Composite leading indicators for July in OECD countries continued to strengthen from the COVID-19-crisis lows across all major economies. However, the numbers remain below long-term trends and at levels lower than those recorded prior to the coronavirus outbreak.

The CLIs aim to provide early signals of turning points in the economy that business cycles are likely to follow. Unlike gross domestic product, CLIs are a qualitative measure of indicators that have shown a predictive relationship with GDP, such as consumer confidence, industrial confidence, passenger car registration, manufacturing production measures, orders, demand for services or interest-rate spreads.

After a strong increase in June, the pace of improvement in leading indicators inevitably slowed in most major economies. In China, early signs that appeared in June of the CLI returning to levels seen just prior to the crisis have been reversed, the Organisation for Economic Cooperation and Development reported.

Last week, the organisation highlighted that government-support measures for households succeeded in buffering the economic impact of COVID-19. While real GDP per capita fell by 2% in the first quarter, real household income, which offers a more complete picture of the economic wellbeing of households, grew by 0.1%.

This was mainly the result of household income growth in the US, which was the only G7 economy to record positive growth (0.7%) in real household income per capita. In all other major seven economies, household income fell as fast as real GDP per capita, which contracted sharply.

For the OECD area as a whole, real household income growth outpaced GDP growth by 2.1 percentage points, the largest spread between the two measures since the 2008 financial crisis, the OECD said.

UK GDP to record biggest fall

This week official statistics for the UK economy are expected to show that gross domestic product in Great Britain and Northern Ireland fell by 21% in the second quarter. The figures set to be released on Wednesday would be the biggest quarterly drop of any G7 economy, mainly as a result of the later launch of, and longer-lasting, lockdown measures in the UK.

The Bank of England said last week the impact of the COVID-19 pandemic was less severe than initially thought but it would take the economy longer than expected to recover.

UK’s central bank forecasts GDP to shrink by 9.5% this year, down from the 14% slump projected in May. The bank also issued a revised forecast for unemployment, which is expected to peak at 7.5% at the end of this year, almost double the most recent rate but lower than its previous estimate of just under 10%.

The Bank of England conceded that its forecast is wholly dependent on a wide range of factors.

“The outlook for the UK and global economies remains unusually uncertain,” the bank said in a statement. “It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors.”

Although economic activity has picked up since a trough in April, the Bank of England now anticipates the pace of recovery to slow until the end of the year. The UK economy is not expected to return to the level of the final quarter of 2019 before the end of 2021.

However, some analysts poured cold water on that projection, calling it “overly optimistic”. Berenberg senior economist Kallum Pickering said in a research note, “The V-shaped recovery that the BoE continues to project seems unlikely, to put it mildly.”

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