Industry rebound partial but rapid - Capital Economics
Global Economics

Industry rebound partial but rapid

Global Economics Update
Written by Gabriella Dickens

With lockdowns continuing to ease across the globe, it was of little surprise that the manufacturing PMIs rose in June. While the PMIs are still considerably below their pre-crisis levels, they have rebounded more swiftly than they did during the financial crisis.

  • With lockdowns continuing to ease across the globe, it was of little surprise that the manufacturing PMIs rose in June. While the PMIs are still considerably below their pre-crisis levels, they have rebounded more swiftly than they did during the financial crisis.
  • The jump in the global manufacturing PMI from 42.4 in May to 47.8 in June indicates that the sector is recovering from the coronavirus-related blow earlier in the year. In recent months, the headline index has been distorted by lengthening suppliers’ delivery times, so the output sub-component has given us a better steer on the path of global industrial production. While it is still consistent with declines in output, the annual rate of contraction looks to have eased from 12% y/y in April to around 2% now. (See Chart 1.)
  • The improvement in the PMIs has been broad-based. (See Chart 2.) Admittedly, they generally remained below the 50 no-change mark last month which, taken literally, suggests that activity was still falling in June, albeit to a lesser extent than in May. But the PMIs have been difficult to interpret lately. It is not clear whether respondents are comparing output, employment etc. to that in the previous month (as the PMI, in principle, should) or to a “normal” level or that of a few months ago. We suspect that the increase in the PMIs implies a rise in activity, albeit to subdued levels, even where the indices have remained below 50.
  • Two major economies whose PMIs rose only by a small amount were China and Japan. China is further ahead of other countries in dealing with the virus, so its PMI had already rebounded. The further small increase in June takes the PMI to its highest reading this year. Japan’s PMI, by contrast, has not benefitted from a significant easing of its lockdown since the restrictions were not implemented to the same degree as elsewhere. And a plunge in domestic auto sales appears to have hit Japanese industry hard. The small rise in the PMI, though, tentatively suggests that the manufacturing sector there has now turned a corner.
  • The surveys confirm that there is ongoing weakness in external demand and price pressures are weak. The new export orders component of the global manufacturing PMI, for instance, is consistent with falls in world trade of around 5% y/y. (See Chart 3.) Meanwhile, the global output price index remained below 50, adding to evidence that the disinflationary pressure of weak demand has so far been enough to offset any inflationary effects arising from supply shortages. (See Chart 4.)

Chart 1: Global Mfg Output Index & Industrial Output

Chart 2: Manufacturing PMIs by Country

Chart 3: DM Mfg. New Export Orders & Real Exports

Chart 4: Global Manufacturing PMI Output Prices

Sources: Refinitiv, IHS Markit, Capital Economics


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