Yield Gap Momentum as a Leading Indicator to Predict Turning Points in Industrial Production Growth.

The use of leading indicators to predict turning points in key ouput economic indicators is well-known. Recent work has shown that momentum indicators are an improvement on standard indicators. This paper analyses the likely performance of the momentum of the gap between long- and short-term interest rates as a leading indicator for output growth. The calculations are performed for the UK and Germany. In the UK's case the momentum is found to be a useful addition to a portfolio of leading indicators. Sensitivity analysis is also carried out to examine the stability of the leading indicator.