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Global PMI signals strengthening upturn in October as growth
accelerates in manufacturing and services
Business grows more optimistic, but cautious mood indicated as
employment held steady
Rising COVID-19 containment measures cast shadow over near-term
outlook
The worldwide PMI surveys indicated a solid start to the fourth
quarter for the global economy, with business activity rising at
the fastest rate for 26 months. Business confidence also improved
markedly as companies grew more optimistic about the year ahead.
However, firms remained cautious with regard to hiring, keeping
payroll numbers steady on average amid worries about the impact of
second COVID-19 waves, which cast a shadow over recovery prospects
in the coming months.
Global PMI sees strong start to Q4
The headline JPMorgan Global PMI™ (compiled by IHS Markit) rose
from 52.5 in September to 53.3 in October, its highest since August
2018. The PMI has now indicated expanding business activity for
four successive months, reflecting a rebound in economic activity
in the third quarter and at the start of the fourth quarter after
the COVID-19 pandemic caused an unprecedented collapse in the
second quarter.
However, the recovery signalled by the global PMI remains only
modest both in terms of GDP growth and relative to the amount of
output lost during the height of the pandemic.
In terms of GDP growth, the PMI is running at a level broadly
consistent with annualised GDP growth of just over 3%. That
compares with a peak rate of decline of around 12% signalled at the
height of the global pandemic back in April [*].
Moreover, between February and June, the PMI recorded a
cumulative 54.3 points of sub-50 (contraction) readings, but since
July, the PMI has only exceeded 50 by a mere cumulative 9.3 index
points. The comparatively modest expansion seen in the past four
months therefore hints at only part of the output lost to the
pandemic having been recovered so far.
Consumers act as drag on recovery
The recovery also remained uneven, with consumers acting as a
drag on the overall pace of expansion in October.
Although growth accelerated in both manufacturing and services
to 32- and 19-month highs respectively in October, the latter
continued to lag the factory sector thanks primarily to an ongoing
downturn of activity within consumer-facing service sector
businesses, the output of which was fallen continually over the
past nine months.
Some weakening of consumer-facing markets was also evident in
manufacturing, however, with output of consumer goods growing at a
weakened rate for a second successive month, markedly
underperforming growth rates seen for investment goods (such as
plant and machinery) and intermediate goods (comprising inputs
bought by other manufacturers).
Encouragingly, financial services activity growth accelerated
markedly in October to the highest since February 2012, and
business-to-business services growth hit a 19-month high, driving
the re-acceleration of overall service sector growth after a
steadying of the rate of expansion seen in September.
Exports of services fall at increased rate
While a key development driving growth in the factory sector has
been a revival of global goods trade, the opposite applies to
services. Manufactured exports rose globally for a second month
running in October, albeit with the rate of expansion slowing
marginally, but service sector exports continued to fall sharply,
with the rate of decline in fact gathering pace for a second
consecutive month. A significant portion of service sector exports
are accounted for by travel and tourism, which continued to be hit
especially hard by COVID-19 travel restrictions and renewed
lockdown measures.
Can strong growth be sustained?
Looking ahead, the survey's gauge of firms' expectations for
their own output in 12 months' time rose sharply in October,
reaching the highest since June 2018. Sentiment improved markedly
in both manufacturing and services, linked to hopes of a vaccine or
treatment bringing an end to the economic disruption caused by
COVID-19 in the course of the coming year, as well as expectations
of further stimulus from governments to support economies in the
meantime.
However, while the upturn in confidence about the year ahead is
encouraging, it tells us very little about the next three-to-six
months, where the picture is more concerning. Given that there is a
broad-based expectation that a COVID-19 vaccine will be widely
available by the second half of 2021, it is perhaps no surprise
that companies have become more upbeat about their output in a
year's time. More worrying is the fact that, despite output (and
new orders) growth accelerating in October, companies globally held
their staffing levels unchanged on average. A marginal rise in
service sector headcounts was negated by a further cut in factory
jobs.
The reluctance to boost headcounts is unusual given the increase
in firms' backlogs of uncompleted work in recent months, and hints
strongly at a reluctance to add to staff costs in the face of such
an uncertain near-term outlook for demand, given the resurgence of
COVID-19 in many countries.
Lockdown measures raise growth worries
Companies reticence to take on extra staff fires a warning shot
over recovery hopes, often reflecting concerns that second waves of
virus infections will curb demand in the near term, hitting order
books and revenues.
Further waves of virus infections have already led to increased
lockdowns and other precautions in recent weeks, which have
affected business activity in growing numbers of companies.
The degree to which economies have 'locked down' in the fight
against the pandemic can be gauged by IHS Markit's COVID-19
Containment Index. This gauge is based on a basket of measures
applied by governments to control the spread of the pandemic, such
as non-essential business closures, school closures and travel and
mobility restrictions linked to social distancing policies. As
these measures are tightened, the index rises towards 100 and a
relaxation of measures causes the index to fall towards zero.
The global average COVID-19 Containment Index had eased from a
peak of 64 in April to 32 in September, but has risen again to 35
in October, representing a significant and tightening degree of
containment.
The degree of containment has also remained far higher than had
been expected just a few months ago, reflecting the scale of
resurgent infection numbers in many countries. For example, back in
June, governments' plans to open up their economies had pointed to
the global containment index falling to just 18 by October instead
of the current reading of 35.
What's more, the path to further opening up economies is now
gloomier than had been expected back in the summer. Given
governments' notified plans for future virus containment measures,
the Global COVID-19 Containment Index is now expected to rise
further to 37 in November and still be stuck at 34 by the end of
the year, whereas back in June it was projected to have fallen to
just 12 by year-end.
Projections out to June 2021 indicate that the global
containment is on course to remain at 17, reflecting the ongoing
need for many social distancing and other virus protection measures
to remain in place for longer than previously thought necessary by
governments worldwide, meaning economic growth rates will
inevitably be weaker than previously anticipated over this
period.
[*] We use OLS regression to estimate the annual growth rate
of GDP implied by the PMI. This model indicates that the annual
rate of decline likely peaked at approximately -11.7% back in April
at the height of worldwide COVID-19 related lockdowns, but that the
relaxation of virus restrictions has since helped drive an
improvement to an approximate 3.3% rate of growth in August and
September. Note that this does not indicate that the economy is now
larger than a year ago, merely that the rate of growth on an annual
basis has improved to around 2.5%, which still represents a very
modest rate of expansion relative to the collapse seen at the
height of the pandemic.
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.
