Economic strategists are always seeking better indicators that can prove valuable in signposting the economic path ahead. Think of the Baltic Dry Index (BDI), which is an index that tracks the price of transporting dry bulk cargo like cement, coal, iron ore, and grain on bulk freighters. As many of these commodities are raw materials that go into the production of finished goods, the BDI is often taken to be an indicator of economic growth and production. Or electricity consumption in China, which often proves a more reliable indicator of economic activity than the official numbers. But can Sweden tell us anything about the current turn in global economic activity? Turns out it probably can.
A key feature of the Swedish economy is its openness and liberal approach to trade and doing business. Sweden has traditionally been an export-orientated nation, and typically maintains a trade surplus, i.e. the value of goods and services it exports is greater than the value of imports. It is also a country with reliable and up-to-date data.
Source: BCA Research
As a small open economy, Sweden’s economic performance is a good barometer of global growth developments. The Swedish Purchasing Managers Index (PMI – a measure of the prevailing direction of economic trends in manufacturing) for March was overall positive. The Manufacturing PMI rose to the 50 growth-contraction line (a so-called “diffusion index”) following 19 consecutive months of contraction, leading the Composite PMI higher from 50.1 to 52.8 in March, and the prior month’s numbers were revised up.
The important point is that there is a fairly close correlation between the Swedish numbers and global economic activity – with the Swedish figures leading by around 6-12 months. So if the Swedish numbers are rising, there is a likelihood that global growth will follow.
The signal from Sweden’s economic performance corroborates other recent trade data. Taiwanese and Singaporean exports to China are likewise regarded as bellwethers of the global industrial cycle. Both grew on a year-on-year basis (after adjusting for Lunar New Year distortions), and their highly pro-cyclical exports of electronics also expanded over the same period. The US has been a large driver of the revival in global trade, while other trade powerhouses such as China and Germany are still fairly weak.
In addition, the copper price has been strong of late, often regarded as a good tell of the health of global industrial production.
Source: Trading Economics
All these indicators suggest that the improvement in global economic conditions can continue in the coming months, which should be positive for commodity prices – important for the Australian economy. But remember, these indicators are not ironclad rules, and historical trading patterns are not always repeated. In markets, nothing is guaranteed.
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