Global Daily – Global manufacturing in the doldrums

by: Nick Kounis

In this publication: Global manufacturing PMI points to continued stagnation in May. Manufacturing PMIs broadly stable at lows in eurozone, US and China…though bellwether US ISM index painted a more optimistic picture. We expect a moderate improvement going forward, though risks remain.

 

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Global manufacturing still in a rut

The global manufacturing PMI inched down to 50 in May from 50.1 in April, suggesting that the sector continues to stagnate. The more forward looking components of the survey such as new orders remained at weak levels, indicating that a significant improvement is not imminent. In addition, the manufacturing exports index fell further below the 50-mark, which does not bode well for world trade (see chart). Manufacturing remained depressed in the large economies. The eurozone manufacturing PMI fell to 51.5 from 51.7, China’s remained at 50.1, while the US Markit PMI index edged down to 50.7 from 50.8.

 

If there was one ray of light in yesterday’s releases, it came from the US ISM manufacturing index. Although it is not included in calculating the global aggregate (as the Markit measure is preferred) it is a survey with a long and distinguished history as a business cycle indicator. It beat expectations in May, rising to 51.3 from 50.8. The new orders index in the survey has been at relatively elevated levels over the last few months, so could be a sign of better times ahead.

2 Jun

 

Moderate improvement going forward

Indeed, there are reasons to think that global manufacturing and the world economy more generally will see a moderate improvement over the next months. A number of factors that drove the soft patch in global growth have improved, though they may take some time to gain some traction. For instance, financial conditions have clearly eased, helped by an upturn in investor sentiment following reflation efforts by central banks. Capital has started to flow back into emerging markets over the last few months after sharp outflows previously. Finally, oil prices have recovered, which should help alleviate some of the stress that the previous low levels were causing for producers.

 

Risks remain

Having said all this, risks remain. Vulnrabilities remain in the US and other advanced economies and even more so in emerging markets, and there are question marks about whether they would be able to digest Fed rate hikes. Financial risks in China remain high and if anything have only increased. Finally, political risks from Brexit, to the Spanish elections, to the US Presidential elections remain significant.