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Global PMI rises to 50.8, signals fastest growth since
January
Upturn led by Europe, Russia and China, while US stabilises,
Japan and India contract
Jobs continue to be cut amid weak demand, linked to further
COVID-19 containment precautions
The worldwide PMI surveys indicated a strengthening of global
economic growth in July, led by rebounding activity from COVID-19
lockdowns notably in Europe and Russia as well as sustained robust
expansion in China. US business activity stabilised but remained
subdued by virus containment measures, however, sending a warning
signal that global growth could slow again after the initial
rebound amid rising worries over second waves of virus infections.
An additional concern is that worldwide employment continued to
fall despite widespread government policy support, with job losses
even accelerating in some countries.
Global PMI shows a further rise
The JPMorgan Global PMI™ (compiled by IHS Markit) rose for a
third successive month in July, up from 47.8 in June to 50.8. The
latest reading breached the no-change 50.0 level for the first time
in six months to indicate expanding output across the combined
manufacturing and service sectors.
Despite the rise, the PMI remains below the level seen at the
start of the year, as well as below both the 2019 average (51.7)
and the average seen over the past decade (52.3), indicating that
the rate of growth remains subdued.
We use a linear 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 -12% 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 0.6% annual rate of growth in June and a 2% rate
of growth in July. Note that this does not indicate that the
economy is 2% larger than a year ago, merely that the rate of
growth on an annual basis has improved to around 2%, which still
represents a very modest rate of expansion relative to the collapse
seen at the height of the pandemic.
Note also that the global PMI dropped a cumulative 54.5 points
into negative (sub-50) territory between February and June, and has
now only seen 0.8 index points in growth territory, highlighting
the small steps taken so far in recouping output lost to the
coronavirus.
Activity subdued by virus containment
The PMI had collapsed to an all-time low of 26.2 in April as
governments around the world took increasingly drastic measures to
contain the COVID-19 pandemic, including the widespread closures of
non-essential businesses and restricting movement and travel. Since
then the PMI has risen sharply as these containment measures have
been eased, though the still-subdued level of the PMI reflects the
fact that some measures remain in place, and recent weeks have even
seen some restrictions re-imposed.
The degree to which economies have deem '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 has eased from a
peak of 59 in April to 35 in July. Over this period, companies
participating in the PMI surveys often noted how the re-opening of
economies helped spur business growth, both via some firms being
permitted to open their doors again and demand from customers
reviving.
However, one month ago it was anticipated that the Global
Containment Index would have fallen even further - to 31 - in July,
given governments' prior notifications of planned loosening of
restrictions. A key development in July was the tightening of
restrictions in the US on average, as well as a more moderate
loosening of restrictions in some other countries where virus
numbers picked up again during the month.
The good news is that, despite increased fears of resurgent
COVID-19 infection numbers, pandemic restrictions are still set to
ease in coming months, with the Global Containment Index due to
fall to 33 in August and eventually dropping to 18 by the end of
the year, assuming governments do not alter their lockdown
plans.
However, it's clear that the pace of opening up the world's
economies has slowed, which will likely affect the PMI numbers
going forward. Even on current virus number trajectories, each
month will see only small steps in removing containment measures
compared to earlier months, which will provide less of a boost to
the PMI. It should also be noted that the Global Containment Index
is still set to remain at 18 by December (zero indicates no
restrictions), which suggests that ongoing COVID-19 social
distancing measures are likely to subdue economic growth at least
until the end of the year. The reality is that we will see these
containment measures persist well into 2021. The risk is that
growing worries about second waves of infections will also push
containment tighter again.
France reports strongest growth, India suffers steepest
downturn
The link between coronavirus lockdowns and PMI readings is
further illustrated by comparing the national composite PMI
readings (encompassing both manufacturing and services) relative to
national containment indices.
The comparisons show, for example, that India saw the tightest
COVID-19 restrictions of the economies surveyed in July, and also
saw the lowest PMI reading. China, with the loosest restrictions
fared well in terms of PMI growth, albeit outpaced by France,
Russia, the UK and Germany. The UK composite PMI hit a five-year
high, with 29- and 23-month highs seen in France and Germany
respectively, pushing the eurozone PMI to a two-year high. In
Russia, the composite PMI hit a three-and-a-half year high, buoyed
by the largest jump in service sector activity since 2008.
These variations in performance are of course a function not
just of the degree of containment but also the change in
containment: whereas China saw its containment index ease by two
points in July, the eurozone and UK saw 12.5 and 15-point easings
respectively. In Russia, the containment index has meanwhile
slumped from 67 in May to 34 in July.
The relatively poor performance of the US, which saw only a
modest expansion of business activity to thereby slip below the
global average in July, was often linked to the re-imposition of
lockdown measures in some states (the US Containment Index rose
from 44 in June to 50 in July), as well as growing worries about
the lingering economic impact of the crisis. Note that new orders
for goods and services fell in the US, albeit only modestly,
contrasting with increasing growth in Europe and China, the latter
seeing the largest gain in new orders for almost ten years.
China leads in the year-to-date
The relative success of China in containing the virus and
reopening its economy is reflected in China's composite PMI running
far higher than any other major economy so far this year: an
average PMI reading of 48.3 against a global average of 42.6.
Outside of China, the best performance (or more correctly the
least severe downturn) has been seen in the US, in part reflecting
a relatively low COVID-19 containment index on average up to
June.
The worst year-to-date performances have been seen in India
followed by Japan and Brazil. Both have been hit hard by the
pandemic as well as the recent steep downturn in global trade, with
Japan also marred by a prior sales tax hike, which dampened
consumption.
Autos leads global upturn
The global manufacturing sector reported a larger output gain
than the service sector, and has also reported the stronger
performance so far this year, though both returned to growth for
the first time since January.
Output rose in 18 of the 26 manufacturing and service
sub-sectors during July, led by autos & parts manufacturing.
Chemicals & plastic production, pharmaceuticals & biotech
also fared well, as did drink manufacturers, household goods
producers and construction material producers.
The strong performance of autos was especially notable,
reflecting the restarting of production after closures and rising
sales as customers returned to forecourts, especially in
Europe.
Resurgent growth in household goods production largely reflected
the re-opening of retail, while the return of workers to building
sites boosted demand for construction materials.
Besides other (non-banking) financials, the tourism and
recreation sector saw the steepest decline in output in July,
reflecting ongoing social distancing precautions. The sector has
also seen by far the steepest downturn in the year-to-date. Not
surprisingly in the face of the pandemic, healthcare and
pharmaceuticals have fared best (by considerable margins) so far
during 2020, followed by food producers.
Jobless recovery so far
Virus numbers and associated containment measures will clearly
be the most important determinants of economic recovery paths in
coming months, but the job market will also be important to watch,
especially as job retention programmes come to an end in some
countries. A jobless recovery would likely be tepid at best, and
ultimately short-lived after the initial rebound from lockdowns and
temporary non-essential business closures.
So far, the global PMI has seen new order inflows rise in July
for the first time since January, helping reduce the rate of job
cutting to the weakest since February. However, the rate of order
book growth lagged that of output, indicating that at least some of
the upturn in output was fuelled by firms processing orders placed
in prior months (often prior to the pandemic) rather than
reflecting new demand. Backlogs of works consequently continued to
fall, albeit at a reduced rate.
Jobs were therefore subsequently cut again, dropping globally
for a sixth successive month, as firms continued to scale back
operating capacity despite the small rise in new orders in July.
Worryingly, the rate of job cutting remained higher than at any
time seen over the past 11 years prior to the pandemic.
The US bucked the global trend of falling employment in July,
registering a composite PMI employment index above 50 for the first
time since February. In contrast, rates of job cutting accelerated
in Japan and India and failed to ease in the UK, where the service
sector cut headcounts at a faster rate.
Over the year so far, UK has recorded the sharpest fall in
employment of the major economies, followed by the Spain and then
Brazil. The smallest declines have so far been seen in Japan
followed by China. The resilience of labour markets in both China
and Japan have been especially noteworthy during the pandemic.
Tourism & recreation jobs continue to
slump
Jobs data for all countries will be especially important to
watch as, in many cases, the current situation reflects payroll
number having been supported either through direct furlough schemes
or by other fiscal stimulus measures. Governments will need to be
careful in unwinding these schemes to prevent a further steepening
loss of jobs, especially in sectors such as hospitality where
demand is unlikely to return swiftly in the absence of a vaccine or
effective COVID-19 treatment.
Service sector jobs fell more sharply at the height of the
COVID-19 lockdowns than factory employment, but are now showing
signs of recovering more rapidly, although numbers are still
falling. In July, real estate, healthcare services, pharmaceuticals
and biotech led the jobs rebound, but all other sectors reported
falling payroll numbers. The steepest declines seen in metals &
mining and autos (despite the latter seeing the latest output gain
during the month).
So far this year only healthcare services and pharmaceuticals
& biotech have reported any growth in employment. Tourism &
recreation has seen the steepest decline, by a wide margin,
followed by auto makers.
Outlook
The outlook therefore depends on whether the demand indicators
will continue to improve beyond the initial rebound from the
lockdowns, and in particular how employment will hold up when
support measures are removed, all of which will in turn be dictated
by the path of the pandemic. Any renewed faltering of the PMIs in
coming months will flash warning signs of a W- rather than V-shaped
recovery, as is already being hinted at in the US.
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.
