Overnight the OECD released its Composite Leading Indicators for major economies. The upshot was an accelerated decline in global growth prospects (although the index remains above trend). But what is most interesting is that most of the world is now sinking and without the US, would be already be in deep trouble:
It’s pretty obvious which major economy is leading the decline, Europe is plunging, versus the, to date, controlled slow down in China and the resilience in the US. To help understand why this is the case, I’ve drawn up a couple of extra charts to define the trade contagion emanating from Europe.
The underlying economic imbalances of the Eurozone’s and its self-defeating attempts to rectify them through austerity have contributed to semi-permanent and permanent recessions in Portugal, Spain and Greece, which are soon to be joined, if they are not already, by the crashing economy of Italy.
Of course, it has been no surprise that as this process has transpired, core European countries are slowly being drawn in as the collapsing demand of the periphery feeds back into core country exports. The following pie chart helps illustrate why:
That’s right. 71% of European imports are from other European nations, that is, intra-European trade. Unfortunately Eurostat has not yet published 2010 figures (let alone 2011) so if we’re going to calculate what level of export impact the periphery counties are having on core countries then we’ll have to rely on earlier figures. 2009 was an atypical year of global recession but in 2008 177,ooo billion euros or 11.3 % of intra -European imports were in PIGS nations. That has been enough, combined with a slowing global economy and the liquidity crunch, to destabilise core European growth, as we’ve seen in recent PMIs.
Now, as we add Italy (and it’s new austerity drive), the amount of import demand under pressure doubles to $350 billion euros, 22.4% of the total.
Which brings us to the trade contagion pipeline that will increasingly head to other major nations from the further inevitable declines in growth within Europe. First the US, with Europe its largest export market:
And China, likewise:
Less so, Japan:
The OECD CLI continues to suggest that the US and China have some sort of handle on their respective slowdowns. Europe not so and I expect trade contagion (as well as financial contagion) to increasingly drag in other major economies.
