global economy — Alpha.Sources

Global Leading Indicators, March 2025 - The world before tariffs, and after

The March 2025 edition of the global LEI chartbook can be found here. Additional details on the methodology are available here. I’ve added a few new elements: a chart showing the G20 LEI and its three-year rolling Z-score; a comparison between headline LEI diffusion and global equities; and a chart of the first three principal components of the LEIs. Of these, the first component is the most significant—as I’ll explain below.

As the name suggests, leading indicators are designed to provide early signals on the business cycle, and by extension, on the cyclical component in financial markets and the most cyclical individual sectors. However, there are times when turning points or events disrupt the underlying conditions so abruptly that they effectively reset the clock. Trump’s tariff shock—and its implications for global goods and capital mobility—is one such event. But for the record: what did the global economy look like on the eve of this tariff shock? As it turns out, it was doing quite well.

A look at the bright side

I detect a lot of worry about the global economic outlook. This is understandable. Equities are close to, or at, record highs with extended valuations. Growth fears have crept higher on investors’ list of concerns, most notably with signs of softness in the US labour market as well as persistently weak domestic demand in Europe. Add a still-fragile Chinese economy to the mix, despite hopes of stimulus, and the prospect of a leap in economic uncertainty after next month’s US presidential elections, it is no wonder investors are on edge. But what if I told you that global leading indicators are strong and healthy and that combined with falling inflation and falling interest rates, this is one of the best macro-setups for risk assets. I suspect many would reply that such tailwinds already are comfortably priced-in to equity and credit markets. I am sympathetic to that point, but hear me out.

Cruising for a Bruising

Financial market pundits are a bit like dogs chasing cars; they wouldn’t know what to do if they caught one. And so it is that after trying to figure out whether the economy and markets would achieve a soft landing in the wake of the post-Covid tightening cycle, no one quite knows what to think now that the soft landing appears to have arrived.

Let’s list the key requirements for a soft landing.

It's time to play defense

After two weeks on the road seeing investors, I am convinced that portfolio managers are becoming increasingly sceptical about the synchronized global recovery. That’s probably a good shout. I recently surveyed global leading indicators, and didn’t like what I was seeing. The data since have been worse. My in-house diffusion index of global leading indices has been flat since the start of the year. Its message is simple, global manufacturing accelerated sharply for most of last year, but momentum petered out in Q1. It doesn’t yet point to an outright slowdown, though other short-leading indices, such as the PMIs, do. The signal is more uniformly downbeat for the global economy if we look at liquidity indicators. Inflation is rising, with oil prices at a 12-month high, and nominal M1 growth is decelerating. Historically, this has been one of the more reliable omens for slowing growth in the global economy. Of course, investors don’t have to peruse economic data to tell them that something is afoot. Let me see whether I can remember everything. We have had wobbles in emerging markets, the return of political risk and higher bond yields, and even euro-exit chatter, in the Eurozone periphery as well as the morbid fascination that Deutsche Bank is going to blow a hole in the European, and perhaps even in the global economy.

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