PMIs may understate severity of downturn - Capital Economics
Global Economics

PMIs may understate severity of downturn

Global Economics Update
Written by Gabriella Dickens

March’s small rise in the global manufacturing PMI was driven entirely by a rebound in China and masked sharp declines elsewhere. The survey already points to falls in global production, but it is probably understating the extent of current weakness and further falls are to come as containment measures bite.

  • March’s small rise in the global manufacturing PMI was driven entirely by a rebound in China and masked sharp declines elsewhere. The survey already points to falls in global production, but it is probably understating the extent of current weakness and further falls are to come as containment measures bite.
  • The final manufacturing PMIs for March suggest that the widespread implementation of containment measures outside China has weighed on global production. While China’s PMI rebounded, headline indices fell across much of the world. (See Chart 1.) Many countries saw their manufacturing PMIs plummet to levels not seen since the financial crisis, including the US and Japan.
  • At the global level, the index is still consistent with further falls in industrial output. (See Chart 2.) Admittedly, it suggests the pace of decline eased slightly. But the survey is yet to fully reflect the effects of containment measures, which only began in many cases towards the end of March. And in any case, the surveys might not ever fully reflect the severity of the downturn. Only companies that are still open will be able to respond to the surveys. And the surveys tend to measure the breadth of the downturn, rather than the depth. In other words, they can tell us whether activity is going up or down, but not by how much. (See here.)
  • On the face of it, the rebound in China offers hope that this will be a short, sharp shock. But it’s far from clear that other economies will recover as quickly. And even in China’s case, there’s a risk of a renewed decline as weak global demand takes its toll.
  • Global trade appears to have been hit hard. The new export orders index plunged to its lowest level since the financial crisis and was consistent with a sharp contraction in world trade volumes of around 4% y/y. (See Chart 3.) And the big fall in the suppliers’ delivery times index also indicates that there has been a severe dislocation of supply chains. Meanwhile, the fall in the output price component is consistent with our view that the disinflationary impact of weaker demand will, in general, more than offset the inflationary impact of supply disruptions. (See Chart 4.) (See our Global Inflation Watch.)
  • The big picture, though, is that contrary to previous downturns, manufacturing will probably not fare as badly as the services sector. The final services PMIs, released on Friday, are likely to reflect that.

Chart 1: Manufacturing PMIs by Country

Chart 2: Global Mfg. PMI & Industrial Production

Chart 3: Global New Export Orders & Trade Volumes

Chart 4: Output Price Index

Sources: Refinitiv, IHS Markit, Capital Economics


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