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The pace of economic growth across the four largest developed
economies slowed sharply in January to the lowest since June 2020
as the Omicron variant disrupted business activity. The impact was
most fiercely felt in the service sector, with manufacturing
supported by an easing of supply constraints. The reduced supply
squeeze helped alleviate price pressures in manufacturing, but
service sector charges spiked higher on rising energy and staff
costs, pointing to still elevated levels of inflation in coming
months. The outlook meanwhile remained one of heightened
uncertainty, albeit with easing supply constraints helping boost
prospects in the manufacturing sector.
Developed world growth slides to 19-month
low
Flash PMI surveys for January signalled a sharp slowing in the
pace of economic growth across the world's largest developed
economies to the weakest since the recovery from the first
lockdowns began in mid-2020. Growth in the 'G4' developed economies
of the US, Eurozone, Japan and the UK had surged to an all-time
high in May 2021 as economies opened up from pandemic-related
restrictions, but growth subsequently slowed sharply as the demand
recovery faded and the COVID-19 Delta wave further disrupted
economies and supply chains. Another downshifting in the rate of
expansion is now evident at the start of 2022 as the Omicron
variant led to a further surge in virus infection rates.
Although new orders across the four largest developed economies
continued to rise, the January increase was the weakest for nearly
a year, in turn resulting in the smallest increase in companies'
backlogs of work for ten months.
Measured across the G4 economies, the service sector was
especially hard hit by Omicron, with activity slowing to
near-stagnation, registering the weakest increase for 18 months.
Manufacturing output growth slipped to the second-lowest in 17
months, but remained relatively resilient, buoyed in part by a
further alleviation of supply constraints.
Japan and Australia contract, US stalls
The flare up of Omicron caused both Japan and Australia (the
latter also covered by the flash PMIs) to fall back into decline,
representing their third downturns so far during the pandemic. Both
saw reduced service sector activity, with Australia's manufacturing
economy also slipping into contraction. However, Japan's factory
sector continued to expand, and at a solid rate.
The US meanwhile saw growth slow sharply to indicate a
near-stalling of the economy, with both manufacturing and services
reporting greatly weakened performances to record only very modest
expansions during the month.
In Europe, Eurozone growth hit an 11-month low and growth in the
UK continued to run at a rate similar to the 12-month low seen in
December. Both economies battled against the Omicron variant,
though with manufacturing output growth rates picking up amid fewer
supply chain delays.
Supply constraints ease further record highs, though
not in the US
One of the principal reasons for the relative resilience of
manufacturing could in part be explained by spending switching from
face-to-face services to goods as the Omicron wave took hold, but
the factory sector also saw an easing of supply chain disruptions.
Measured across the G4 economies in January, supplier delivery
times continued to lengthen, but to the smallest degree since March
of last year. The incidence of delays appears to have peaked back
in October amid the Delta wave, and it has been encouraging to see
delivery times not lengthen at an increased rate so far during the
Omicron wave.
However, there are some notable regional differences in supply
chains. While delivery delays in Europe eased considerably during
January, delays worsened in the US, likely due to ongoing port
congestion and other logistical issues which appear to be on the
wane in Europe but still prove problematic in the US.
Varying sector price trends
A welcome by-product of the broad easing in supply chain
pressures was a cooling of input cost inflation, with raw material
prices paid by manufacturers across the G4 economies showing the
smallest monthly increase since last May. Notably, this easing in
cost pressures included the US, despite the additional domestic
supply chain pressure recorded during the month.
However, while producers' input cost inflation eased, average
prices charged for services rose at a record rate across the G4
economies, with new highs recorded in the US, Eurozone and UK.
Japan remained a striking exception, with charges barely
rising.
Higher service charges were associated with soaring energy and
staff costs, compounding supply and demand imbalances.
Average prices charged for goods and services consequently rose
at increased rates in all G4 economies, running at or near record
rates in all cases to hint at further sustained and elevated
inflationary pressures.
Future expectations
Looking ahead, hopes of alleviating supply shortages played a
material role in lifting manufacturers' future output expectations
higher in both the US and the Eurozone, albeit with optimism in the
former limited by concerns over shipping delays. In the UK,
improved prospects due to alleviating shortages were conflicted by
concerns over the damaging effect of Brexit on trade with EU
countries. In Japan, COVID-19 worries dominated, pushing
expectations lower.
In the service sector, COVID-19 worries likewise pushed future
activity expectations lower in Japan, the US and Eurozone, but
prospects brightened in the UK. This likely reflects the timing of
the Omicron wave, which hit the UK earlier than the other
economies. UK firms consequently reported a brightening picture due
to the imminent re-opening of the economy, but firms in other
countries remained very uncertain either as to when restrictions
will be lifted, or case numbers start to decline. Much will of
course depend on how governments react to the Omicron wave, with
the UK (and specifically England) appearing to be relatively
relaxed regarding the health impact of the Omicron wave.
Outlook
When looking ahead, it is encouraging that demand - as measured
by new orders - continued to rise at a stronger rate than output
across the G4 economies in January, reflecting the ongoing
constraints on output (namely supply chain delays and worker
shortages due to the virus). Output growth could therefore
reaccelerate, provided supply constraints continue to ease. We will
therefore need to assess the broader supply situation out of Asia
in January and February via the final PMIs to gauge extent of
global supply constraints more fully.
As for demand, it's worth noting that, although the cooling of
demand growth witnessed in January was in part attributable to the
spread of the Omicron variant, the slowdown often coincided with
reports of customers baulking at higher prices or having incomes
squeezed by recent inflationary pressures, as well as fewer reports
of companies building inventories.
Geopolitical concerns, notably in Ukraine, and the trend towards
monetary and fiscal tightening that is widely anticipated in many
economies - led by the US - in coming months is also likely to be
detrimental to demand growth.
It is therefore possible that, while the global economy may be
over the worst in terms of supply delays, these constraints are
persisting (though not worsening) at a time during which demand
growth is also waning, which points to risks being tilted towards a
slower pace of economic expansion.
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.
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