The rise in the EM manufacturing PMI in July (to 51.4) should be treated with caution but, even so, it still suggests that conditions in EM manufacturing are improving. The recovery is likely to be fastest in China and Central & Eastern Europe.
- The rise in the EM manufacturing PMI in July (to 51.4) should be treated with caution but, even so, it still suggests that conditions in EM manufacturing are improving. The recovery is likely to be fastest in China and Central & Eastern Europe.
- The reading of 51.4 is the highest in since January and almost a two-year high. The increase takes the EM manufacturing PMI back above 50, the theoretical divide between expansion and contraction compared to the previous month.
- There are a number of reasons for caution. First, the headline EM PMI significantly underestimated the slump in EM industrial production in April, so it may be overstating the subsequent rebound. A quick glance at Chart 1 suggests that we shouldn’t put too much stock on today’s headline reading. (See Chart 1.)
- Second, the pick-up in the EM manufacturing PMI has been driven in part by China. Excluding China, the EM PMI did edge up, from 46.8 to 48.4, but remained below 50. Indeed, more broadly, the PMIs from many countries dipped last month, while others are still below 50. (See Chart 2.)
- Generally speaking, PMIs appear to have rebounded in countries which have controlled the virus well (parts of Emerging Asia and Central & Eastern Europe). But PMI’s fell (or remained weak) in countries where the virus is still spreading rapidly (India, Mexico, South Africa).
- One exception to this rule is Brazil, where the PMI hit a record high last month. But the rebound here was due at least in part (though not entirely) to an increase in suppliers’ delivery times, which usually signals stronger demand but may in the current climate reflect disruption to supply chains.
- We think that industry should continue to recover in China. Policy support is lifting domestic activity, and further stimulus efforts should kick in over the coming months. Contained coronavirus outbreaks and easing lockdown measures will help activity to recover relatively quickly in Emerging Europe too.
- But industrial sectors elsewhere will experience more fitful recoveries. Mexico and South Africa are two countries where prospects look particularly bleak. Indeed, employment indices are still stuck in the 30-40 range, suggesting significant labour market scarring from the crisis. More generally, there are signs from our Mobility Trackers that economic activity may have tailed off towards the end of last month in countries where the virus continues to spread.
Chart 1: EM Manufacturing PMI & EM Ind. Prod
Chart 2: Change in EM Manufacturing PMI Between June and July
Sources: Refinitiv, Markit, Capital Economics
Edward Glossop, Senior Emerging Markets Economist, firstname.lastname@example.org