Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks. Click here to read more international insights.
The aviation industry's incurable optimism is like a seat-belt sign for investors. That's the conclusion of a Breakingviews study of global airline orders and economic growth. Aggressive aircraft orders have an inverse relationship with expansion in global GDP a year later. If that affiliation holds, big orders by Asian airlines point to rising risks of economic turbulence next year.
The study looked at annual aircraft orders since 1995, and singled out the years when airlines expanded their fleets at a faster rate than the long-term trend. Next, it looked at what happened to GDP growth in the following year. A decline of 0.5 percentage point or more in the growth rate counts as a slowdown.
The past two decades offer some striking examples. Airlines ordered a third more planes in 1997 than in 1996, according to data from Ascend Online Fleets. A year later, the world economy stalled. Aircraft orders almost doubled in 2000, just before another downturn. In the year before the 2008 meltdown, jet demand surged 33 per cent. Orders spiked again in 2011, and global growth slowed the following year.
Of course, airlines are not directly responsible for dragging the world economy into recession. But they do seem to embark on plane-buying frenzy late in the economic cycle. So what are the odds that aircraft orders are pointing the way to another slowdown?
So far this year, orders net of cancellations have reached 714, boosted by a bumper $24-billion (U.S.) purchase by Indonesia's Lion Air. If the total for this year reaches last year's 2,232, the Breakingviews analysis suggests there is a 42-per-cent chance of the global economy hitting an air pocket in 2014.
Like all predictions, this one should be treated with caution. In any year, there is about a one-in-three chance of global growth faltering regardless of demand for aircraft. But when airlines go on a buying spree, the chances of a slowdown rise.
That risk is not reflected in official projections: The International Monetary Fund expects the global economy to expand by 3.4 per cent next year at market exchange rates, up from 2.6 per cent in 2013. But unless airlines curb their enthusiasm for new planes, investors should take the precaution of strapping themselves in.