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Following the release of record-low PMI figures today, the
latest dynamic factor-based models for the euro zone and the UK
unsurprisingly clearly point to a sharp deterioration in economic
conditions during the opening quarter of 2020.
Our model-based estimates now show quarterly contractions of
approximately -0.1% for both the euro zone and the UK. These are
markedly lower than their respective nowcast highs seen through the
current cycle, around 0.2 percentage points lower for the euro area
and 0.3 percentage points for the UK. However, with the clearly
considerable impact of COVID-19 in mind, some important points to
note with the latest nowcasts.
We recognise that, on balance, the dynamic factor models are
likely underestimating the current rate of contraction.
It is well known that such models tend to be sluggish in
adjusting to rapid and volatile changes in the economic
environment. This reflects the data intensive nature of a factor
model, which takes a range of information from across many data
sources, a notable proportion of which is inherently backward
looking when provided by official statistics offices (think
industrial production, trade and retail sales figures for
example).
Whilst such official data sources play a crucial role in the
dynamic factor model - adding considerable quantitative meat to the
directional signals provided from softer indicators to enable them,
on average, to provide the best estimates of European growth
developments - there is inevitably a time lag (or "catch-up") in
performance compared against the more "low-tech" solutions that are
based purely on the timeliest and earliest economic indicators.
In other words, it's really a matter of timing and the available
information to hand when volatility and uncertainty abound. Given
the sheer scale of the declines in output that are likely to be
occurring in March, a simple PMI-based model tends to be better
equipped at offering a baseline estimate of
changes in GDP.
For the Eurozone, the average Output PMI level of 44.2 over Q1
already suggests a quarterly fall in GDP in excess of -1.0%. For
the UK, an average reading of 47.4 over the first quarter points to
a fall in GDP of at least -0.3%.
However, there is obviously a great degree of uncertainty at
this juncture, and it is perhaps worth noting that PMIs are already
at or close to record lows for March alone and implying rates of
decline in GDP greater than anything we saw during the height of
the financial crisis.
Indeed, the March PMI record low of 29.7 for the eurozone is
already consummate with GDP declining at a quarterly rate in excess
of the -2.0% mark (with Germany tracking at slower rate of decline,
and France deteriorating faster).
However, Italy has, by some margin, recorded the most
significant economic shock in March. The Composite Output PMI here
fell by 30.5 points to signal the extremity of the current
situation. Such a considerable and deep fall in economic activity
in such a short period can be difficult to quantify, but March PMI
data alone are consistent with a quarterly contraction of somewhere
between 2.5 to 3.0%.
Finally, the UK's PMI of 36.0 likely signals a decline of
somewhere between 1.5% to 2.0% in GDP heading into the second
quarter.
Joe Hayes, Economist, IHS Markit
Tel: +44 1491 461006
joseph.hayes@ihsmarkit.com
Paul Smith, Director, IHS Markit Tel: +44 1491 461038
paul.smith@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.
