The CLIs for March 2020 recorded the largest drop on record in most major economies in line with the considerable economic shock caused by the COVID-19 pandemic and its immediate impact on production, consumption and confidence in the wake of lockdown measures.
Over the next few months, in particular, care will be needed in interpreting the CLI.
• Firstly, with considerable uncertainty around the duration of lockdown measures, the ability of leading indicators to predict future movements in the business cycle[1] has been severely curtailed: current estimates of the CLI are able to provide meaningful signals on current movements in activity, and should therefore be viewed as coincident rather than leading[2].
• Secondly, as always, the magnitude of the CLI decline should not be regarded as a measure of the degree of contraction in economic activity, rather it should be viewed as an indication of the strength of the signal that economies have entered a phase of contraction. For comparison, the signal is stronger now than it was at the time of the Financial Crisis.
• Thirdly, the CLIs are not yet able to anticipate the end of the slowdown, especially as it is not yet clear how long, nor indeed severe, lock-down measures are likely to be. However, as the situation settles, even with a more prolonged lockdown, the CLI will begin to recover its ability to predict as firms and consumers begin to adapt to new (even if only short-term) realities, especially as governments begin to formulate and provide signals around longer term strategies, beyond the initial immediate measures they have had to impose.
Notes
1 The CLI is optimised to identify turning points and not for judging the speed or strength of a recovery or downturn in the business cycle; and users should not interpret it in this way. A very high or low CLI for example cannot be interpreted as an indication of very high or low levels of economic activity or growth. It merely provides a strong signal of the phase a country is likely to be in its business cycle in the near future. For more information please consult the longer OECD note (link).
2 Clearly, this makes them less useful than we would like them to be at the present juncture but even as a coincident indicator they remain important and useful. Measures of economic activity, such as GDP growth for example, are only at best available one-month after the reference period. In that sense therefore, even as a coincident measure, the CLI retains some of its ‘leading’ properties, allowing us to take the pulse of economies in near to ‘real-time’.