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By HaleStewart April 8, 2014 4:15 pm
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Why Isn't the Growth in the EU's Leading Index Translating Into Meaningful Economic Growth?

Above are two charts of Conference Board's leading index (top chart) and coincident index (bottom chart).  If the LEI's are to be believed, the EU economy should be taking off at this point.  But the coincident index is barely moving.  And the annual rate of GDP growth has barely turned positive:

So -- why hasn't growth taken off?

The answer lies in the components of the LEIs:

37.5% of the index is comprised of money supply growth.  The assumption for this metric's inclusion in the LEIs is that money supply growth will lead to the growth of loans.  Increasing the amount of money in circulation should lower interest rates, thereby increasing demand.  However, loan growth is still negative:

In other words, the mechanism by which monetary base growth would be translated into economic growth (and thereby justifying its inclusion in the LEIs) isn't occurring.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

 

 

 

 

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