Past the worst, but gradual recovery only - Capital Economics
Global Economics

Past the worst, but gradual recovery only

Global Economics Update
Written by Gabriella Dickens

May’s Flash PMIs revealed a partial rebound, suggesting that the global economy is past the nadir. But, the recovery in advanced economies appeared slower than that in China, and the services sector remains particularly weak.

  • May’s Flash PMIs revealed a partial rebound, suggesting that the global economy is past the nadir. But, the recovery in advanced economies appeared slower than that in China, and the services sector remains particularly weak.
  • With lockdown measures starting to ease in most advanced economies in May, the flash PMIs rose from April’s record lows. The US still seems to be suffering the least. (See Chart 1.) And compared to the size of the rebounds in the US, the euro-zone and the UK, Japan’s was relatively disappointing. At the aggregate level, the Flash PMIs are consistent with the DM composite PMI increasing to 32.7 this month, from April’s record low of 22.2.
  • But while the headline indices rose, they remained well below the 50.0 no-change threshold. Taken at face value, that suggests that activity was even weaker in May than it was in April. (The survey asks firms to compare the current month’s level of output etc. to that of the previous month.) However, that is at odds with the latest daily activity data which suggest that activity increased this month. Instead, it seems more likely that firms are comparing output to pre-virus levels, rather than directly with April.
  • On the face of it, the DM composite PMI is consistent with advanced economy GDP falling by around 5.5 % q/q annualised. (See Chart 2.) But the qualitative nature of the surveys means that this is probably a best-case scenario. (See here) Indeed, our forecast is for a contraction of around 48% q/q annualised in Q2.
  • The services sector has continued to bear the brunt of lockdown measures, with the services PMI remaining well below the manufacturing equivalent. (See Chart 3.) But other sectors have suffered as well. Indeed, external demand appears to have remained very weak in May with the new export orders component of the DM composite PMI only edging up and consistent with world trade falling by 14 % y/y. (See Chart 4.) Meanwhile, the employment sub-index continued to point to unprecedented levels of job cutting.
  • The big picture is that the rise in the Flash PMIs implies that, in advanced economies at least, we appear to have passed the worst. And with lockdowns easing further in June, we expect to see a further improvement next month. However, labour market scarring and weak demand suggest that the rapid rebound many commentators hoped for at the start of the virus is not in sight.

Chart 1: Composite Flash PMIs

Chart 2: Developed Markets Composite PMI & GDP

Chart 3: DM Services & Manufacturing PMI

Chart 4: DM Mfg. PMI New Export Orders & Exports

DM PMI data for April are CE estimates based on US, EZ, JP & UK.

Sources: Refinitiv, IHS Markit, CPB Netherlands, Capital Economics


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