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Flash PMI™ survey data for June are historically consistent
with global GDP returning to growth on an annual basis
Looser COVID-19 containment restrictions have helped drive a
record rise in the weighted PMI output index for the largest
developed economies
Job losses have also eased
The world's largest developed economies showed a further marked
easing in the rate of decline in June amid another relaxation of
restrictions designed to control the coronavirus disease 2019
(COVID-19) pandemic. Although output fell across the 'G4' developed
economies, according to provisional 'flash' PMI data, the rate of
contraction moderated sharply for a second successive month, rising
to a level historically consistent with global GDP returning to
growth on an annual basis.
Global economy shows signs of recovery from
COVID-19
The IHS Markit Flash PMIs are early releases of survey data
based on around 80% of the total number of replies usually received
during a month. As such, they provide the first, internationally
comparable, insights into how economic conditions are changing.
Currently, flash PMI are produced for the United States, the
eurozone, Japan, the United Kingdom and Australia, encompassing
manufacturing and service sector business conditions in each
economy. These survey data can in turn be weighted together
according to each country's GDP to form international aggregates.
Weighting the US, eurozone, UK and Japan PMIs together, for
example, creates a "G4 developed world" series of indicators,
covering output, new orders, employment, inflation etc.
Because these four largest developed economies account for
approximately half of global GDP (at market prices), the G4 flash
PMI output index acts as both a good indicator of the Global PMI as
well as global GDP growth. Since 2007, when IHS Markit's US PMI
series were first included in the global PMI database, the flash
PMI has exhibited a 94% correlation with annual percent changes in
global GDP with the PMI acting with a lead of one quarter. Using
regression analysis, we can infer a rate of GDP growth from the
PMI.
The G4 economies' flash PMI output index surged by a record 12.4
index points in June, building on a prior record leap of 11.7
points in May to push the index up to 45.7 from an all time low of
21.5 in April. While large, the rise is not particularly
surprising: April saw vast swathes of these economies locked down
to prevent the spread of the coronavirus, with these restrictions
being gradually lifted in prior months. However, many restrictions
remain in place, which goes some way to explain why the PMI remains
below the 50.0 'no change' level, which indicates that more
companies continue to report falling activity than report an
increase.
More encouragingly, the historical relationship of the flash PMI
with global GDP suggests that the latest reading of 45.7 is in fact
broadly consistent with the global economy growing 0.2% on a year
ago. While meagre by historical standards, such a return to growth
represents a swift turnaround in economic performance from the
height of the pandemic in April.
Service sector sees strongest easing
The service sector saw the mildest decline in June, but had also
suffered the steepest downturn at the start of the second quarter
amid widespread social distancing restrictions, which hit sectors
such as travel, tourism, hotels, restaurants and high streets
especially hard. While some of these service-based companies have
seen activity start to pick up, many remain closed and have
struggled amid dwindling demand as joblessness rises.
Many other parts of the service sector, notably the vast
business-to-business services sector - which did not face the same
degree of business closures as consumer-facing companies - have
likewise reported tough trading conditions amid subdued demand. The
overall drop in G4 economies service sector output was nevertheless
the weakest since the lockdowns began four months ago, thanks
primarily to the lifting of some of the restrictions.
Manufacturing decline moderates
In manufacturing, many factories closed at the height of the
pandemic in April while many others scaled back production
capacity. The reopening of many companies has therefore helped lift
the G4 economies' PMI manufacturing output index from an all-time
low of 25.5 in April to 43.6 in June.
However, even at this improved level, the manufacturing index
points to more companies reporting lower production than an
increase in June, and remains historically consistent with global
manufacturing output falling in year-on-year terms, albeit at a
greatly reduced rate compared to that seen in prior months.
Japan sees steepest output decline
Looking at the four largest developed economies, the UK saw the
mildest downturn in output, followed closely by the eurozone and
then the US. France even saw modest return to growth, buoyed by
rising domestic demand. Japan trailed behind, being the only
economy to see an increased rate of manufacturing output
contraction as weakened global trade flows continued to weigh on
factory activity. Japan also reported the steepest ongoing decline
in service sector activity.
However, looking over the second quarter as a whole, it is the
UK that has suffered the largest drop in output, followed by the
eurozone and Japan. The US has recorded the mildest decline.
Labour markets key to recovery speeds
In terms of anticipating recovery speeds in the months ahead,
the further planned relaxing of COVID-19 containment measures
should help bring the PMIs into growth territory in the third
quarter, barring any further waves of infections, which at this
stage remains a non-insignificant risk. The easing in IHS Markit's
Global containment index (which takes a basket of restriction
measures in each country to gauge the degree of 'lockdown'), from a
peak of 58 in April to 39 in June and 31 in July, bodes well for
business activity to recovery some of the lost ground. We note,
though, that the PMIs need to rise commensurately higher than 50 to
make up for any drop below 50 in prior months before any lost
output is recovered. Given high levels of unemployment, such strong
growth may prove difficult to achieve.
As well as COVID-19 containment measures, labour markets will
therefore be important in determining recovery speeds. The flash
PMI employment index showed an encouraging easing in job losses
across the G4 developed economies for a second successive month in
June, with headcounts being trimmed at the slowest rate since
employment began falling in March.
The steepest loss of jobs in June (and in the second quarter as
a whole) was recorded in the UK, followed by the eurozone, with far
more muted declines seen in the US and Japan, the latter seeing an
especially modest degree of job cutting.
Importantly, in all countries, government support has so far
helped limit job losses, meaning a further wave of redundancies
could follow in many countries unless demand rises sufficiently to
sustain current staffing levels.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
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.
