- China’s manufacturing PMI dipped in March, which could trigger the authorities into action
- Eurozone whole-economy PMI roughly stable, but prices dip signalling ongoing disinflation
- US manufacturing PMI fell back, but remains at high levels – strong growth ahead
Weak China PMI sets scene for stimulus
The week began with the publication of the flash PMIs of the world’s largest economic zones. The index fell for the US, the eurozone and China in March. However, while the US and eurozone surveys remained at levels consistent with ongoing recovery, China’s survey painted a weaker picture. The flash manufacturing PMI unexpectedly fell to 48.1 in March from 48.5 in February. The consensus was for a rise, probably based on the view (which we shared) that the Lunar New Year had previously distorted the data to the downside. Although the PMI surveys are not as good at tracking economic growth as their counterparts in advanced economies, we do think that this is a sign that the authorities will treat seriously. Indeed, the last time the PMI fell to around these levels (in the summer of last year) we saw a macroeconomic policy stimulus and it seems likely that we will see a similar response this time as the authorities attempt to keep growth close to their 7.5% target. The authorities are already planning to bring forward investment projects, as part of the ‘New Urbanisation Reforms’, which is very much in line with the idea that the economy needs some help.
Eurozone composite PMI moves sideways, price components signal ongoing disinflation
The eurozone composite PMI output index moved roughly sideways, edging lower to 53.2 in March from 53.3 in February, according to the flash estimate. The services sector activity index declined to 52.4 from 52.6, while the manufacturing output index edged higher to 55.4 from 55.3. The only noticeable changes in the details of the report were in the price components, with the composite output price index falling to 48.6 from 49.3 and the input price index falling to 51.1 from 53.0. This signals continuing disinflationary pressures in the eurozone and is in line with our view that inflation in the region will fall in the coming months, moving further below the ECB’s target for price stability. The remainder of the PMI report held few spectacular elements. The manufacturing PMI’s new orders index and the services PMI’s new business index both were largely unchanged (at around 54.5 and 52.0, respectively), while the composite employment index was stable at 50.2. All in all, the composite PMI is in line with ongoing moderate growth of eurozone GDP (we have pencilled in 0.4% qoq for 2014 Q1, following 0.3% in 2013 Q4).
US March manufacturing PMI eases a bit from February rebound
The US preliminary manufacturing PMI eased a bit, falling to 55.5 in March, down from 57.1 the month before. This was lower than the consensus forecast of a drop to 56.5. Although manufacturing surveys have responded differently to the harsh winter weather, according to Markit, February’s manufacturing PMI was boosted by a rebound from January’s severe weather (when the index fell to 53.7), which brought the index to a near-three year high. As such, it was no surprise to see some payback in March. Still, in the first quarter of this year, the average monthly reading was 55.4, up from 53.8 in the final quarter of last year. This is in line with our view that the winter weather did not fundamentally alter the underlying trend in manufacturing output. Indeed, we continue to think that this year industrial output will be underpinned by a sharp increase in final domestic demand growth. Private sector balance sheets are strong and the profit share is at the highest level since the 1950s. This suggests that companies are in a good position to invest, build inventories and hire. With employment growth likely to strengthen, consumer demand is likely to benefit. At the same time, fiscal consolidation, a major drag on growth last year, has faded significantly.