What Are the OECD’s Leading Indicators and Why Are They Important?

he Organisation for Economic Co-operation and Development (OECD), is a global economic body that collects and publishes economic statistics and data. 

They have a range of economic data that we can use for various economies, and the world, but one of the most popular leading indicators is the Composite Leading Indicator, also known as the CLI. 

This indicator combines economic measurements and is used to forecast future economic performance, primarily over the short-term. Let's take a look at the OECD’s leading indicators and their importance to the global economy.

What Are the OECD Composite Leading Indicators?

OECD leading indicators are economic measurements that give insight into where the global economy is headed, with the CLI being one of the most popular for the global economy. 

It includes a combination of both economic and non-economic factors that are used to predict changes in the economic climate, and includes over 100 components such as consumer confidence, credit, oil prices, and unemployment.

Although it can be a good gauge for the global economy by using data from OECD countries, it can also be used for individual countries or economic areas, such as the EU or the G7. 

According to the OECD, the indicator is “designed to provide early signals of turning points in business cycles” 

The indicator is composed of both short-term and long-term components. By combining these two components, they can gain a better understanding of the global economy and what the future may look like.

However, turning points can be notoriously difficult to predict. But the CLI has shown its ability in predicting these, with the OECD aiming for a 6-9 month lead time.

Why Are OECD Leading Indicators Important?

Globalisation has meant that individual economies, like the UK or the US, are becoming increasingly interconnected with the global economy. 

This means what happens in the global economy can have a direct impact on a country's domestic economy. For example, if there is a recession in a major global market, it can affect the demand for a country's exports and lead to slower economic growth at home. Similarly, if there is a financial crisis in one part of the world, it can lead to a tightening of credit and a reduction in investment, which can also have negative effects for other countries.

For these reasons, it is important for individual economies to be aware and be able to respond to developments in the global economy. This may involve adjusting monetary and fiscal policies in response to what’s happening in the global economy.

By being attuned to the global economy and taking appropriate actions, countries can minimise the negative impact of global impacts on their own economies, or take advantage of economic growth for new opportunities. 

This information is invaluable for businesses and governments, as it allows them to make informed decisions and plan accordingly, particularly as a global economic slowdown is likely to cause a domestic one.