Global Growth Tensions Reflected in Diverging Data Points

Confirmation of slower growth in China in August triggered further tumbling of global stocks on September 1st. The first of the month is when we get the Purchasing Managers’ Indexes (PMI) from Markit for the previous month for the manufacturing sector for most important economies. In the case of China we also get an official PMI reading. These are some of the timeliest indications of the current pace of economic activity. In China, the government’s PMI fell below 50, the level that separates expansion from contraction, to 49.7, the lowest reading since August 2012. The private Caixin-Markit PMI, at 47.3, was stated to be “the quickest deterioration in operating conditions for over six years.” Weak demand in the markets for goods and factors of production was reported. There was also an unexpected slowdown in service-sector business activity. The services index, at 51.5, while still above 50, fell sharply from July’s 53.8% reading. One reason was slower expansion in the financial sector, probably reflecting the turbulence in China’s stock markets.

The slower growth readings strengthen expectations that China will be ramping up efforts to put a floor under the economic slowdown. Look for both further steps to loosen the still-tight conditions in China’s financial markets and further fiscal stimulus. China’s concerns about the volume of the continuing capital outflows was reflected in reports that the People’s Bank of China (PBOC) will impose a 20% reserve requirement on financial institutions trading FX forwardsand that regulators are going after illegal financial transfer activities.

China’s economy was not the only one registering weaker manufacturing sector growth in August, according to the PMI reports. The JPMorgan Global Manufacturing PMI, at 50.7, while still indicating positive growth, posted its slowest growth in 28 months. Along with China, contractions were reported for France, Taiwan, South Korea, Indonesia, Malaysia, Russia, Brazil, and Greece.

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There were some important bright spots, however. In Asia, the Nikkei Japan Manufacturing PMI hit a seven-month high, supported by a sharp increase in new orders. India and Vietnam also registered expansions. The news for Europe, aside from France, was positive, in contrast to the weakness in European stocks. The Eurozone PMI, at 52.3, was just a whisker below July’s 52.4 reading and confirms continued solid production and new business growth in both domestic and export markets. Employment in the Eurozone’s manufacturing sector rose at the fastest pace in four years. In Germany manufacturing growth accelerated, hitting a 16-month high, with a sharp rise in new orders. Spain’s manufacturing sector also continued to improve, with a sharp increase in output but a slowdown in the growth of new orders.

For the US the PMI, to quote Markit, “… highlighted a slight loss of momentum across the manufacturing sector.” The reading was 53.0, compared to 53.8 in July. While still solid, this was the slowest pace since October 2013.

On balance, global manufacturing has clearly been somewhat weaker in the current quarter. The magnitude of the equity market reactions on Tuesday to the PMI reports suggests that investors may be focusing too heavily on manufacturing sector developments. Service sector PMIs came out today. In August the J.P. Morgan Global Services PMI indicated an acceleration with output rising at the fastest pace in four months. Spain and Ireland were “standouts” and strong growth also was registered in the service sectors of the Eurozone (“matching June’s four year high”), Japan (“22 month high”), India (“output gathers momentum”), and Germany (“strongest rise in business activity since March”). Similarly, in the U.S. the service sector registered the sharpest output increase for three months. The service-sector readings are important for judging the overall pace of economic activity. In the more advanced economies the service sector accounts for a much larger portion of the economy than the manufacturing sector, 78.1% in the US, 73% in the Eurozone, and 67% in Japan.

The pace of GDP growth in both the US and the Eurozone continues to look likely to increase during the remaining months of 2015 and into 2016, while Japan, more heavily affected by the China slowdown, should at least be able to maintain its current modest 1% growth.

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Chief Global Economist
bill [dot] witherell [at] cumber [dot] com ()