Hong Kong has entered into another recession since the global financial crisis in 2008. Economic cycle fluctuations rarely occur out of thin air, and there’re usually signals beforehand. People who are aware of these signals are able to foresee such changes. This time around, several leading economic indicators have raised red flags to Hong Kong’s economy.
A recession typically occurs after two consecutive quarters of decline in Gross Domestic Product (GDP). GDP is an important but not the timeliest indicator. To gain insight into economic trends and changes in the economic cycle, leading economic indicators should be used instead.
On the topic of leading indicators, you may be more familiar with the U.S. treasury yield curve. The inverted yield curve, a scenario in which short-term debt instruments have higher yields than long-term debt instruments, has happened several times in recent years in the U.S., causing many to believe that the country is heading into a recession. Other commonly used leading indicators also include equity index such as S&P 500, Purchasing Managers’ Index (PMI), M2 money supply and Index of Consumer Sentiment (ICS).
Instead of one or two indicators, a basket of economic indicators should be used in assessing the trend of an economy. Economic structure varies from country to country. Major economies such as the U.S., Eurozone, Japan and OECD countries have the practice of compiling their own leading economic indices based on varied but similar sets of data. For example, the U.S. Leading Economic Index is composed of 10 economic components including the average weekly hours of manufacturing workers, the average weekly initial claims for unemployment insurance, manufacturers' new orders for consumer goods and materials, the ISM Manufacturing New Orders Index, new orders for nondefense capital goods excluding aircraft orders, the amount of new building permits for residential buildings, the S&P 500 Index, the Leading Credit Index, the spread between the 10-year treasury bonds yield and the federal funds rate, and the average consumer expectations for business conditions. Meanwhile in the Eurozone and Japan, their leading economic corresponding indices are comprised of 8 and 10 economic indicators respectively.
We often use leading economic indicators to predict Hong Kong’s economy, and the Hang Seng Index is probably the most familiar one for most investors.
Learn more: 2020 Investing during recession
