Is business confidence pointing towards a downturn?

 Yesterday, I posted a piece about global business confidence.  I am in the process of expanding and altering my databases, and adding more business and consumer confidence time series as well as revising  my time series processing programs.  

The time series I plotted was a composite of two different business confidence indicators, one for the USA and one for OECD Europe as a whole.  

I've since added some more business confidence series, which has allowed me to calculate business confidence indicators covering more of the world.  

The chart below shows G7 and G11 industrial production and business confidence.  

20 years ago, the G7 (the USA, the UK, Germany, France, Italy, Japan and Canada) were key to the world economy and served as a good proxy for it.  But other countries grew fast, and we needed to take them into account.  So we got the G11:  the original G7 plus China, India, Russia and Brazil.  Together they make up roughly 2/3rds of world GDP.  Also on the chart is G11 business confidence.  (All the indicators are my calculations, using weights derived from purchasing power parity GDPs.)

As can be seen, G7 and G11 industrial production move in similar cyclical patterns (which is what the deviation from moving trend is designed to portray) but in fact the G11 growth rate has been much higher than the G7.  Over the last 20 years, the G11 growth rate has been a full percentage point per annum higher than the G7, and over the last couple of years, the gap has been even higher.  

What's happening now is that G11 business confidence is falling, while G11 industrial production is picking up steam, because China is recovering, even while G7 IP is slowing.  Clearly, business confidence tends to lead the cycle, turning down before the economy does, and also up before it does too, though the lead at the top of the cycle is longer than at the bottom.  So this divergence now between G11 IP and business confidence is very interesting.  The business cycle gave a false signal in 2004, and so it's not infallible.  But remember, it leads the cycle, by between 6 months and a year, so its decline is yet to be fully reflected in economic activity.

We are, I think, at a cusp, and conventional indicators might not work too well, because the uncertainty and disruption caused by Trump's tariff follies are unique in my long professional experience.  Logic leads me to believe that the combination of extreme uncertainty and big blockages to world trade will lead to rising inflation in the US, and lower growth everywhere.  But we won't know for a few more months, by when it will be too late. In the meantime, the big question is how much US tariffs will damage world growth outside the US, especially in China.  I am following the latest releases of economic and financial data in a way I haven't for many years. 

In response to the question I pose in my title for this post, the answer is most likely yes.

Click on the chart to enlarge it.