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October's preliminary PMI numbers showed growth picking up in
the US and UK and reviving in Japan and Australia thanks to
stronger service sector expansions. The eurozone bucked this
improving trend, however, as its service sector growth slowed,
accompanying a broader manufacturing slowdown that is also evident
in the US and UK. Importantly, the weakness of manufacturing is
being driven by supply chain issues, which are pushing price
higher, leading to unprecedented inflationary pressures.
The combination of strong services growth and rising price
pressures will add to the case for policy tightening in the US and
UK, but the outlook for growth is by no means certain.
Developed world growth edges higher
Flash PMI surveys for October saw welcome returns to growth for
the Japanese and Australian economies as the impact of the COVID-19
Delta wave faded, with falling case numbers also helping boost
business activity growth in the US. UK growth also accelerated as
the economy continued to open up, despite seeing rising virus case
numbers, leaving the eurozone as the only major economy to suffer a
weakening expansion during the month.
At 50.7, the au Jibun Bank composite flash PMI for
Japan rose above the 50.0 no change level for the first time
since April, with returns to growth seen in both manufacturing and
service sectors. Companies commonly associated the recovery to a
reduction in COVID-19 cases and looser pandemic restrictions. New
case numbers have fallen from over 20,000 per day in August to the
low-hundreds in recent days, according to Our World in Data.
Similarly, at 52.2, the equivalent index for
Australia indicated a resumption of growth after three months
of decline. While manufacturing output rose in Australia for a
second successive month, it was the service sector which drove much
of the turnaround in September, returning to growth after three
months of activity being quashed by COIVID-19 restrictions which
were subsequently eased in October.
Covid case numbers have meanwhile been trending lower in the
United States since peaking amid the Delta wave spread in early
September, which helped lift growth the fastest since July thanks
to a surge in service sector activity. However, US manufacturers
reported the weakest output growth since July of last year, with
production inhibited first and foremost by supply delays and
secondly by labour shortages. The US composite PMI nonetheless rose
from 55.0 to 57.3.
A slowing of manufacturing growth was also evident in Europe. In
the
United Kingdom, an acceleration of service sector growth to the
fastest for three months was in part countered by a near-stalling
of factory output, which showed the smallest monthly gain since the
lockdowns seen at the start of the year. The near evaporation of
manufacturing growth nevertheless failed to halt the overall PMI
rising sharply in the UK, from 54.9 to 56.8, running just shy of
the equivalent US index thanks to the service sector gain.
In the
eurozone, manufacturing growth held up more resiliently than in
the UK, but still showed the weakest increase since the recovery
from the early-2020 lockdown began in July 2020. However, unlike
the US and UK, the eurozone saw weakening manufacturing growth
being accompanied by a slowdown in the service sector, which posted
the weakest increase in output since April. This twin-slowdown
pulled the overall eurozone composite PMI down from 56.2 in
September to a six-month low of 54.3 in October.
Supply constraints hit record highs
A key factor across the countries was a shortage of components
and supply delays, which led to weaker manufacturing performance
than would otherwise have been possible under current demand
conditions. Note than, across the G4 economies as a whole, output
growth has lagged growth of new orders continually over the past
eight months, causing backlogs of uncompleted work to rise at an
unparalleled rate over this period.
The disappointing news from October was that these shortages
showed no signs of abating, and in fact appear to have worsened. On
average, suppliers' delivery times lengthened across the four major
developed economies in October to an extent not exceeded in over 20
years of data collection. A record lengthening of delivery times
was seen in the US while the UK and Eurozone saw the
second-greatest lengthenings on record, and Japan the
third-greatest.
Unprecedented price hikes
A further common thread in the October flash surveys was the
feeding through of supply shortages to higher prices again. In the
US and UK, labour shortages were also seen to have been driving up
staff costs and wages.
Average input costs consequently rose at record rates in the US,
UK, Eurozone and Australia, with input costs in Japan rising at a
pace not seen since 2008. Faster rates of increase were registered
for both manufacturing and service sector costs across the major
economies.
Prices charged also rose at accelerated rates as these higher
cost burdens were passed down to customers, with rates of inflation
reaching new survey highs in the US, Eurozone and UK and rising to
the highest since 2018 in Japan.
Policy tightening
Despite the return to growth seen in Japan, the weakening of the
eurozone expansion offset some of the service-sector led
improvement in the US and UK to lift overall "G4 economies" growth
only modestly higher in October. However, although well down on the
recent peaks seen in the second and third quarters, the overall
rate of expansion is well above the pre-pandemic average (the G4
composite PMI at 55.2 in October compares with a pre-pandemic
average of 52.8), pointing to above trend economic growth at the
start of the fourth quarter.
Upcoming data
Upcoming PMI data should prove crucial in paving a clearer path
for policy.
Encouragingly, in the first instance, November's manufacturing
PMIs for Asia should help to understand whether supply from Asia is
starting to improve after production was badly hit by the Delta
wave. September already saw some signs of output improving in the
Asia-Pacific region, which should translate into some easing of
global supplier delivery times, albeit with a lag and dependent on
logistics capacity - notably shipping - being accessible. See "
Global manufacturing subdued by supply constraints, but pressures
from Delta wave show signs of easing", 1st October 2021.
However, the future path of consumer spending and service sector
growth also remains highly uncertain, especially as some of the
current growth reflects some ongoing 'rebound' from earlier
lockdowns. Service sector activity numbers in coming months will
therefore be important to watch to gauge the resilience of demand,
especially in the face of any further COVID-19 waves.
With this above-trend growth accompanied by inflationary
pressures hitting their highest on record, it is not surprising
that central banks are moving closer to removing some of the
pandemic-related emergency stimulus.
Chris Williamson, Chief Business Economist, IHS
Markit
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.
