We determine country- and sector- level spill-over effects by combining two models: one to measure cross-country spill-over effects and another that links the final demand for goods and services with their intermediate uses at the sector level across 40 countries (plus the rest of the world).
Our findings show that the strongest spill-overs from an acceleration in growth in the majors (US, Japan, China and Developed Europe) are felt by Eastern Europe, followed by Western Europe, Asia, and the Americas. At the sector level, cyclicals such as construction, basic metals, and machinery tend to outperform in a positive spill-over.
Further, we find that a positive growth shock to developed Europe has a larger effect on most economies barring the large centres (the US, Japan, and China) than even the US.
Our framework implies that the improvement in global business confidence since June 2013 is especially positive for growth in emerging and developed Europe and cyclical sectors. European equities have generally bounced since June but the cross-country performance does not match the predictions of the model. The performance of cyclical equity sectors is more in line with the model, suggesting they are a better vehicle to express views of further business cycle strength.