Industrial output to fall at double-digit pace - Capital Economics
Global Economics

Industrial output to fall at double-digit pace

Global Economics Update
Written by Gabriella Dickens

Manufacturing PMIs for April fell sharply, but the way the surveys are constructed means that conditions may be even worse than the headline figures suggest. Indeed, the sub-components of the surveys are consistent with global industrial output contracting by more than 10% y/y.

  • Manufacturing PMIs for April fell sharply, but the way the surveys are constructed means that conditions may be even worse than the headline figures suggest. Indeed, the sub-components of the surveys are consistent with global industrial output contracting by more than 10% y/y.
  • Given that containment measures in most economies came into full effect in April, it was no surprise that manufacturing PMIs plunged pretty much across the board. (See Chart 1.) At the global level, the headline index fell to 2009 levels. The falls were even sharper in some economies, notably in India and the euro-zone, where the PMIs fell to record lows. Even China’s PMI dropped back below the 50 no-change threshold as weakening external demand – evidenced by the plunge in the new export orders component from 46.4 to 33.7 – outweighed the positive effect of the relaxation of containment measures.
  • At 39.8, the global manufacturing PMI is, on the face of it, consistent with falls in industrial production of around 6% y/y. (See Chart 2.) However, conditions are likely to be even worse than they first appear.
  • For one thing, the headline number is being artificially boosted by the suppliers’ delivery times index. A fall in this sub-component index reflects longer delivery times and contributes positively to the headline PMI. This is because longer delivery times are usually a sign of excess demand rather than of supply-chain disruption, as they are today. The output component of the PMI – which is a more direct indicator of trends in industrial activity – points to a far bigger decline in production of around 10% y/y. (See Chart 3.)
  • Even the output sub-index, though, could be understating the falls in manufacturing output. As we’ve suggested elsewhere, the qualitative nature of the PMI surveys means it is possible that they struggle to pick up the full extent of deep downturns in industrial activity.
  • Meanwhile, the surveys continue to suggest that world trade has been dealt a heavy blow from the coronavirus. The new orders component of the global manufacturing PMI is now consistent with falls in world trade volumes of around 20% y/y. Historically the manufacturing sector has been hardest hit in global downturns but the nature of the shutdowns mean that the services PMI, due for release on Wednesday, is likely to paint an even bleaker picture. (See Chart 4.)

Chart 1: Manufacturing PMIs by Country

Chart 2: Global Mfg. PMI & Industrial Output

Chart 3: Global Mfg Output Index & Industrial Output

Chart 4: DM Manufacturing & Services* PMI

Sources: Refinitiv, IHS Markit, Capital Economics


Gabriella Dickens, Assistant Economist, gabriella.dickens@capitaleconomics.com