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Flash PMI surveys show narrowing of US - European growth differentials
17 December 2020
Flash PMI™ survey data show the US expansion losing pace amid
rising virus numbers, while looser lockdowns in Europe boosted the
PMI data
Services remain hardest hit by containment measures,
manufacturers report stronger growth
IHS Markit's flash PMI data indicated a narrowing divergence of
economic trends among the major developed economies in December,
linked largely to variations in COVID-19 restrictions. A loosening
of lockdown restrictions in Europe boosted PMI levels in the
Eurozone and UK, while tighter measures in the US pulled the PMI
lower. The US nevertheless continued to outperform the European
economies, while Japan trailed further behind, albeit seeing its
downturn ease further.
Service sectors were once again the hardest hit from social
distancing measures, but better news came from the manufacturing
economy, where output growth accelerated to show a strong
expansion, helping ensure that the economic impact from the
pandemic in the fourth quarter will be far more muted than seen
earlier in the year at the height of the global lockdowns. COVID-19
containment measures will likely continue to inhibit growth in the
coming months, but business sentiment about the year ahead has
improved on vaccine news, brightening the longer-term picture.
Developed world growth accelerates
Flash PMI surveys for the US, Eurozone, Japan and UK, which
collectively account for approximately half of global GDP,
indicated an expansion of business activity for the sixth
consecutive month in December, with the rate of expansion
accelerating slightly compared to November. At 52.2, the G4
economies' flash PMI output index* rose from 51.6 in November.
However, the latest reading remained below the recent highs seen in
August and October, and also remained well below the long-run
survey average of 53.5 seen in the five years prior to the
pandemic. The reading therefore hints at an ongoing, but relatively
sluggish, economic expansion.
*The flash PMIs are based on around 80% of the total number
of survey replies usually received. 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 sectors 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 the 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 was 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.
Faster manufacturing growth contrasts with sluggish
service sector
The headline index masked strong variations by sector, and a
deeper dive into the data reveals an ongoing marked
underperformance of the service sector, which continued to be
constrained by COVID-19 related restrictions. Although
manufacturing output rose collectively across the G4 economies at
the strongest rate since April 2018, growth of service sector
output remained very modest, rising at only a slightly faster rate
than the near-stalled pace seen in November, which had been the
weakest since the sector's recovery began in August.
US outperformance fades
There were also marked variations in performance by country,
though the differentials narrowed compared to November, largely
reflecting variations in government measures applied during the
month to tackle resurgent waves of COVID-19 infections.
Importantly, in all cases the PMIs are signalling a far more
subdued economic impact from COVID-19 in the fourth quarter than
seen at the height of the pandemic in the second quarter of
2020.
November had seen the United States lead the
expansion, with activity buoyed by a relatively low tightening of
COVID-19 containment measures during the month compared to October,
as well as heightened activity around Thanksgiving and a notable
boost of reduced political uncertainly following the Presidential
election. A more severe tightening of virus containment measures in
December, and growing concerns over virus case numbers, has since
pulled the PMI down from its highest level in over five years,
though the index continues to signal robust growth. The survey data
therefore add to the likelihood of the economy having continued to
expand in the fourth quarter, building on the recovery seen in the
third quarter. Service sector growth has nevertheless slowed
especially markedly, and manufacturing output growth has also
weakened, although in both cases the rate of expansion has exceeded
the G4 averages, most notably in the service sector.
In Europe, the
flash Eurozone composite PMI meanwhile
remained in contraction territory, albeit registering only a very
marginal decline in output after November's steep drop. In contrast
to the tightening of COVID-19 restrictions seen in the US, Eurozone
containment levels were eased slightly, though they remained severe
in some member states. Hence the service sector continued to act as
a major drag on the region. Brighter news also came from
manufacturing, where the rate of expansion accelerated to one of
the fastest rates seen in recent years, buoyed in particular by
surging growth among German producers.
The United Kingdom managed to marginally
outperform the Eurozone, as its
composite PMI edged back into growth territory after a national
lockdown led to a contraction of business activity in November.
Service sector activity stabilised but it was the manufacturing
sector that saw the strongest performance, benefitting in part from
a pre-Brexit stockpiling boost.
In contrast to the fourth quarter expansion seen in US, both the
Eurozone and UK are consequently likely to have seen GDP contract
in the fourth quarter.
Meanwhile in Japan, the equivalent
au Jibun Bank PMI - also compiled by IHS Markit - remained in
contraction territory but signalled the weakest decline since the
pandemic-related downturn began back in February. An easing in the
service sector's downturn was accompanied by news of the
manufacturing sector approaching stabilisation.
The survey data therefore paint a picture of economic conditions
improving where COVID-19 containment measures were eased (the UK
and Eurozone), and deteriorating where containment measures were
tightened (the US). Japan's PMI was relatively unchanged,
reflecting no significant change in its virus restrictions during
the month.
Virus holds key to recovery paths
Looking ahead, COVID-19 containment indices are expected to
signal a modest easing of restrictions globally in January and
February, including in the US and Europe, before a more meaningful
relaxation of measures in March. However, the overall degree of
containment is set to remain significant, thereby acting as a drag
on the global economy, and further spikes in virus cases after the
Christmas holidays could see restrictions tighten again rather than
ease.
More positively, hopes of vaccines being rolled out quickly have
risen, which has boosted business expectations for the year ahead.
Sentiment among the G4 economies hit a post-pandemic high in
November and has fallen back only slightly in December, remaining
elevated by recent standards. While rising COVID-19 numbers may
therefore present some speed bumps in the recovery path in the
near-term, the longer-term outlook has brightened in recent
months.
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.