PMIs provide first sign that external demand is faltering - Capital Economics
Global Economics

PMIs provide first sign that external demand is faltering

Global Economics Update
Written by Gabriella Dickens

The global manufacturing PMI survey for January suggests that the industrial recovery lost a bit of steam at the start of the year. It also provided some evidence that, in addition to lengthening supplier delivery times, supply-chain disruptions and surging shipping costs have begun to weigh on export demand.

  • The global manufacturing PMI survey for January suggests that the industrial recovery lost a bit of steam at the start of the year. It also provided some evidence that, in addition to lengthening supplier delivery times, supply-chain disruptions and surging shipping costs have begun to weigh on export demand.
  • The global manufacturing PMI edged down from 53.8 in December to 53.5 in January. More importantly, the output sub-index also fell. On the face of it, it fell to a level that it is still consistent with a solid rate of growth in industrial production of 4% y/y. (See Chart 1.) But the PMI has consistently overstated growth in the past six months, so we doubt the recovery will be anywhere near that strong. We’d put more emphasis on the simple point that the fall in the output index is a sign that industrial conditions are deteriorating.
  • The slight fall in the global PMI masked a divergence at the country level. The PMIs for the US and India were the only ones to rise among major economies. (See Chart 2.) In the US, the rise is consistent with the broader pattern of outperformance of its advanced-economy peers. (See here.) But, in India, with other timely indicators suggesting that the industrial recovery is faltering, we suspect that the PMI will soon drop back. Meanwhile, the biggest disappointment of consensus expectations came from China, where the headline index fell by 1.5 points. Taking a step back, this wasn’t too surprising given that output was already well above trend. We remain upbeat about the near-term prospects for Chinese industry. (See here.)
  • Once again, headline PMIs are overstating strength in the manufacturing sector because they have been boosted by longer supplier delivery times. (See Chart 3.) While longer delivery times are usually just a sign of excess demand – and therefore a reassuring development – today, they also reflect supply-chain disruption in relation to shipping shortages and port congestion. (See here.)
  • There are tentative signs that surging freight rates have begun to weigh on demand for exports. Given that the increase in shipping costs has been largest for routes from Asia, we would expect export demand to fall in Asian economies first. New export orders have come off a bit in South Korea and Taiwan, but not by enough to suggest that shipping has become a major problem for exporters. (See Chart 4.) In contrast, in China, the new export orders index fell below the 50 no-change mark for the first time in six months.

Chart 1: Global Manufacturing Output Index & IP

Chart 2: Manufacturing PMIs

Chart 3: Global Suppliers’ Delivery Times

Chart 4: Manufacturing PMIs: New Export Orders

Sources: Refinitiv, IHS Markit, Capital Economics


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