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Global PMI signalled regional divergence deepening
Delta variant driven divergence aggravates as price pressures
ease
Divergence in growth performance carries key risks, including
for emerging market assets
The JPMorgan Global PMI, compiled by IHS Markit from its
proprietary business surveys, showed global growth tapping the
brakes in June as the JPMorgan Global PMI Composite Output Index
eased to 56.6, a three-month low from the 15-year high in May.
While both manufacturing and service sectors contributed to the
decline of the composite figure in June, services can nevertheless
be seen retaining the apparent lead in terms of growth momentum.
This is congruent with easing COVID-19 restrictions globally on
average to the lowest since the pandemic began.
That said, regional variations in COVID-19 restrictions have
been marked, and economic trends have
to a large extent been driven by vaccine dividend differentials
amid the spread of the Delta variant across many parts of the
world, particularly emerging markets.
As shown, developed world manufacturing and services growth
slowed in June, but notably from very elevated levels. In
comparison, emerging market saw sharp dips for both manufacturing
and services towards near-stagnation levels, according to PMI
figures. While developed world economies continued to enjoy the
reopening boost for economic recovery, particularly services,
emerging market manufacturing and services both reeled from the
Delta wave's setback towards economy recovery.
Divergence deepening as an issue for global
growth
Hints of global growth peaking, according to PMI data, can be
seen during a period in which growth stocks reclaimed the lead
against their value counterparts. As displayed by the US S&P
500 index growth and value ETFs, value stocks which are sensitive
towards economic recovery saw the uptrend stalling in June while
growth names picked up pace to lead the broader market to fresh
heights.
Although positive earnings expectations for tech stocks, which
are most synonymous with growth stocks, ahead of the earnings
release seaon had a part to play, the amalgamation of easing
inflation concerns and burgeoning growth worries had been a major
driving force for the rotation from value to growth.
To expand on the easing inflation pressures trend, the latest
JPMorgan Global Composite PMI prices sub-indices had also
ascertained this. Input cost and output charge inflation both eased
marginally in June. While this is not to say that we are anywhere
near a point to look past supply constraints woes, the trend at
least suggests that price pressures softened. Yet, output slipped
with the surge in COVID-19 breakouts, brought about by the Delta
variant, which appear to be playing a more pertinent role weighing
on global output.
Drilling into the specific regions where the Delta variant
played a part in weighing on output in June, one can see this is
most apparent in various emerging Asian economies, plunging some
areas' factory output into contraction in June.
Risks of Delta variant driven divergence for the global
economy
The effect of diverging regional growth conditions are
multi-fold. On a regional level, areas coping with the Delta
variant, which also renders vaccines less effective on average,
have been subjected to lower demand conditions. This does not bode
well for recovery and furthers the risk of the APAC region and
other emerging markets being left behind.
As it is, spooked by the latest Delta wave, both emerging market
currencies and equities lost their shine against their developed
market counterparts into June. The situation had notably been
aggravated by developed markets' central banks, including the US
Federal Reserve that adopted a more hawkish tone amid relatively
better economic conditions, driving the outflows from emerging
markets.
Rounding back, it is also worth scrutinising the effect on
global economic recovery should the emerging Asia bloc fall behind.
Over and above dampened output, the Delta wave's impact on supply
chains cannot be ignored as the disruption engulfs emerging Asia
and risk prolonging ongoing inflation woes.
All said, a key reason for the divergence in global growth
conditions had been the COVID-19 vaccination progress. June's
economic health check had spelt out loud and clear the urgency for
areas lagging in the vaccination drive to speed up their
inoculation efforts. A catch-up here, which may also qualify these
regions for further easing of restrictions, could alleviate the
current problem of diverging conditions. The uncertainty, however,
lies with how fast the vaccination rates can rise, an area to be
closely watched with the next iteration of July global PMIs.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
