Global Daily – Global industry yet to find a bottom

by: Bill Diviney , Aline Schuiling

US Macro: Manufacturing still a major concern, but services more resilient – It has been a mixed bag of economic data in the US of late. Big picture, the economy is continuing to slow, but it is hardly falling off a cliff. The aggregate story hides some significant divergences below the surface; the manufacturing sector has weakened even more than we had anticipated, while the services sector is holding up rather better than expected. This divergence became more apparent this week, with the ISM manufacturing PMI falling to 47.2 in December – the weakest since June 2009 – while the non-manufacturing PMI recovered to a 4 month high of 55.0. As such, while the manufacturing sector has yet to find a bottom, the weakness has remained relatively contained, with services resilient. The latter is consistent with what payrolls and consumer confidence measures have also been telling us. Ultimately, the lack of a stabilisation in manufacturing keeps us from raising our below-consensus growth forecast of 1.3% for 2020 (consensus: 1.8%). And although some of the headwinds for the sector appear to be easing, there remain significant risks both to the stability of the ‘Phase One’ China trade deal, as well as potential new fronts in the trade war opening up – most significantly, with the US proposing retaliatory measures against France’s digital services tax (and the UK potentially coming into the firing line when it implements such a tax in April). We also continue to expect weakness in manufacturing to eventually drive a renewed slowdown in jobs growth, thereby denting consumer confidence, consumption and the broader economy. However, the resilience of the services sector so far suggests that the risk is for growth to slow by somewhat less than we currently anticipate. (Bill Diviney)

Euro Macro: German factory orders drop – Orders received by Germany’s industrial companies fell by 1.3% mom in November, erasing the two successive rises that were recorded in September and October. The weakness in orders in the three months to November has been concentrated in foreign orders from outside the eurozone, which fell by 3.4% 3m-o-3m in November. Of these, orders for German capital goods dropped by 6% 3m-o-3m and orders for consumer goods fell by 1.2%. In contrast, foreign orders from other eurozone member states were strong in the three months up to November (6.8% 3m-o-3m), which was largely due to a monthly jump in (big-ticket) capital goods orders in October. Orders for consumer goods from eurozone member states declined by 1.2% 3m-o-3m in November. Finally, domestic orders received by German manufacturers also were weak (-0.9% 3m-o-3m). All in all, the orders data suggest that the contraction in Germany’s industry has continued in the final quarter of 2019, although at a more modest pace than in Q2 and Q3 of that year. Such a decline in production would also be in line with changes in the manufacturing PMI and the Ifo business climate in manufacturing, which both pick up somewhat in the final months of 2019 but stayed at levels consistent with falling production. Looking further ahead, we expect that the weakness in Germany’s industrial sector will persist moving into 2020, but that we will see a modest (not v-shaped) recovery in production in the course of the year when global trade is expected to regain some strength. (Aline Schuiling)