- US and China manufacturing PMIs fell in January, but special factors may be at play
- Eurozone manufacturing PMI beats expectations, points to momentum at start of Q1
- We continue to expect stronger global growth in coming months
US and Chinese PMI surveys slip, but special factors at play, and global outlook still positive
Markit’s flash PMI for the US manufacturing sector fell in January, to 53.7 from 55 in December. New orders, output and employment all slowed. However, respondents to the survey clearly signalled that unusually cold weather impacted economic activity. Meanwhile, China’s flash manufacturing PMI also fell, to 49.6 in January from 50.5 the previous month. This is the first sub 50 reading since July 2013. However, the significance of the survey should not be exaggerated. First, China’s data at the start of the year are often distorted by the New Year holiday. Second, even if the reading is reliable it likely reflects sentiment surrounding domestic demand, given that exports have been on firm footing. In this case, there is room for an improvement as China’s authorities have repeatedly signalled that they are willing to do all it takes to keep the domestic economy on a stable growth trajectory. This was already the case this week when the central bank injected liquidity ahead of the Chinese New Year holiday. We expect growth to remain steady at rates of around 8%, as it should remain supported by external demand. Given this, the current policy stance will be sustained, with the economic impact of meaningful reforms felt mainly in 2015. Given that the declines in the US and Chinese PMIs look to be due to special factors, while their counterpart survey in the eurozone rose solidly (see below), we remain of the view that the manufacturing sector is still on a recovery trajectory. We think fundamentals remain consistent with an acceleration in advanced economy demand, which should support emerging market exports and lead to strong growth in the global economy and world trade this year.
Eurozone composite PMI signals Q1 growth acceleration
The eurozone composite PMI (flash estimate) jumped higher, from 52.1 in December to 53.2 in January, reaching its highest level since June 2011. The manufacturing output index increased from 54.9 to 56.7 (highest in almost three years), while the services sector activity indicator rose more moderately, from 51.0 to 51.9, erasing most of the three successive monthly declines that were registered in the fourth quarter. The details of the report show that new orders and new export orders increased in January, lifting the ratio between orders and inventories to its highest level since April 2011, which bodes well for production growth in the coming months. The composite PMI tends to be a good tracker of GDP growth and at its current level it is consistent with growth accelerating to around 0.4% qoq in 2014Q1 from an estimated 0.2% in 2013Q4. This is broadly in line with our base scenario. We expect growth to strengthen mainly on the back of accelerating exports and industrial production, but the negative impact of the drags that have been weighing on domestic demand in the past few years (rising unemployment, falling wages in the periphery, bank deleveraging and fiscal austerity) should slowly diminish as well.
Upward risks to growth forecast for Germany
In Germany, the composite index rose from 55.0 to 55.9 on the back of a jump in the manufacturing output index, with the services sector activity index almost unchanged. In France, a surge in the manufacturing output index was the main driver behind a rise in the composite index (48.5 from 47.3), but the services sector strengthened noticeably as well. As we have mentioned earlier, France’s PMI index has been seriously underestimating economic developments since the start of 2012 (the level separating contraction from growth is no longer around 50, but closer to 45). Therefore, the current level of the composite PMI signals moderate growth in France (around 0.3% qoq), which is in line with our forecasts. In Germany, in contrast, the level of the PMI suggests that the risks to our forecast of a pick-up in growth to around 0.6% in Q1 are tilted to the upside.