Global Macro: Manufacturing accelerating strongly but headwinds ahead – The global industrial sector continued its strong rebound in October. Markit’s global manufacturing PMI rose to 53 in October from 52.4 in September, which represented a 29-month high. In addition, forward looking indicators pointed to the buoyant momentum continuing in the immediate future. Indeed, the index for new orders (55 from 53.8) and expectations of future output (63.4 from 61.8) both rose further. The sector breakdown showed production of capital goods (and intermediate goods likely used in the production of machinery) driving growth, while the consumer goods sector slowed (with the index at the lowest level during the recent upturn). This split was also reflected in the geographical breakdown, with German manufacturing – a machinery producing powerhouse – seeing the steepest rise in new orders in the survey’s history. Global hard data on capital goods orders also point to continued strength in the near term.
However, we do expect the industrial sector to slow in the coming months. The second wave of the virus in Europe and the third wave of the virus in the US are threats to the overall economic outlook, especially in the former where partial lockdowns are spreading across the continent. Indeed, we expect to see a double dip recession in the eurozone. This is likely to lead to a slowdown in consumer demand as precautionary savings rise and capital spending will also likely slow sharply as the outlook darkens. Manufacturers in both China and the US already reported a weakening of export orders to Europe. Meanwhile, the US economy is likely to see a significant slowdown in economic growth, while economic growth in Asia is unlikely to maintain its recent rapid pace as levels of activity have returned to normal, suggesting the catch up is complete. Although global industry will be more resilient to new waves of Covid-19, it will also feel the effects.