At first sight, the latest batch of flash PMIs suggests that recoveries in advanced economies are heading in different directions. However, this has a lot to do with individual economies being in different stages of fighting the virus and easing restrictions. One key take-away is that the surveys are consistent with our forecasts for unemployment to rise in Europe and Japan, even as it continues to fall in the US.
- At first sight, the latest batch of flash PMIs suggests that recoveries in advanced economies are heading in different directions. However, this has a lot to do with individual economies being in different stages of fighting the virus and easing restrictions. One key take-away is that the surveys are consistent with our forecasts for unemployment to rise in Europe and Japan, even as it continues to fall in the US.
- We estimate that the developed markets composite PMI rose from 51.1 in July to 52.4 in August. The sector breakdown suggested that the services sector continued to outpace manufacturing. But the suppliers’ delivery times sub-component of the manufacturing PMI has continued to distort the headline number (by biasing it downwards). The output sub-component of the DM manufacturing PMI – which is not affected by this unusual distortion – points to a 2% y/y rise in production in the coming months. (See Chart 1.)
- While the aggregate DM composite PMI edged up, there were marked differences at the country level. (See Chart 2.) The UK PMI experienced a further sharp rise to an almost seven-year high of 60.3 as lockdown measures continued to ease. The rise in the US composite PMI was even larger, albeit from a lower level. The rise chimes with the recovery in high-frequency indicators seen since virus numbers began descending in late July. Meanwhile, after the surge in new infections last month, Japan’s composite PMI remained unchanged at 44.9. This implies that while the recovery has stalled in August, thankfully it has not gone into reverse. And while the euro-zone PMIs generally remained above 50, they fell almost across the board implying that the recovery there is petering out.
- Given that major advanced economies are at different stages in dealing with the virus, international comparisons about the strength of recoveries are difficult to draw. Even on their own terms, within countries, the composite PMIs have not been reliable guides to the big swings in GDP so far this year.
- However, one thing that August’s flash surveys do clearly show is that in the countries where job retention schemes were deployed (i.e. Europe and Japan), labour markets look set to weaken. Indeed, the employment sub-indices remain at low levels outside the US. (See Chart 3.) The rebound in broader activity does not seem to have been enough to dissuade firms from letting go of some workers and unemployment rates are likely to rise soon in these countries, even as it falls in the US. (See Chart 4.) The bottom line is that, with labour markets weakening, the so-called “easy” part of the recovery is probably reaching an end.
Chart 1: DM Mfg. PMI & Industrial Production
Chart 2: DM Composite PMIs (August = Flash)
Chart 3: Composite PMIs: Employment
Chart 4: Unemployment Rates (%)
DM PMI data for August are CE estimates based on US, EZ, JP & UK.
Sources: Refinitiv, IHS Markit, Capital Economics
Gabriella Dickens, Assistant Economist, firstname.lastname@example.org