May’s PMIs offer evidence that the global industrial sector is now on the slow road to recovery. But with demand extremely weak, activity is still far below normal levels and price pressures have eased.
- May’s PMIs offer evidence that the global industrial sector is now on the slow road to recovery. But with demand extremely weak, activity is still far below normal levels and price pressures have eased.
- While the global manufacturing PMI partially rebounded from April’s decade low, at 42.4, it remains consistent with sharp falls in output. The headline PMIs have been distorted by lengthening suppliers’ delivery times lately, so the output component probably gives a better steer. This suggests that global industrial output is now falling by around 7% y/y having dropped by 12% in April. (See Chart 1.) Admittedly, even the output index might struggle to fully reflect the severity of the downturn given the qualitative nature of the survey. But it should be able to indicate turning points and the key takeaway is that the manufacturing sector seems to have passed its nadir.
- Among the major economies, the manufacturing PMI is highest in China, where the worst part of the crisis and the most stringent containment measures came sooner. But even there it is only just above the 50 level which is theoretically consistent with no change in activity. (See Chart 2.)
- Elsewhere, the picture is worse. Significant rebounds in the US, euro-zone and UK left the indices far weaker than their pre-virus levels and still pointing to sharp falls in activity. And in Brazil and India, with case numbers still rising sharply, industrial activity seems to be falling particularly sharply despite some improvement this month. Japan saw its index decline despite relatively modest containment measures, presumably at least partly reflecting weakness elsewhere in the world.
- Indeed, the new export orders component of the global manufacturing PMI is consistent with a 15% y/y contraction in world trade volumes in May. Another worrying sign in the detail of the survey is the persistent weakness in employment. Even in China, the employment component remained below 50. And the employment sub-index of the manufacturing PMI for advanced economies points to a 4% y/y decline in employment in the G7, suggesting that the crisis will do some lasting economic damage. (See Chart 3.)
- Meanwhile, the global output price index remained below 50, which adds to the evidence that any inflationary effects from capacity constraints have been offset by broader disinflationary pressures related to weak demand. (See Chart 4.)
Chart 1: Global Mfg Output Index & Industrial Output
Chart 2: Manufacturing PMIs by Country
Chart 3: DM Employment PMI & G7 Employment
Chart 4: Global Mfg PMI Output Price Index
Sources: Refinitiv, IHS Markit, Capital Economics
Gabriella Dickens, Assistant Economist, firstname.lastname@example.org