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Recent months have seen Brazil's manufacturers enjoy the
strongest expansion in the PMI's 14-year survey history
Mexico is in its steepest downturn for at least a decade
Survey data point to marked variances, in exports, domestic
demand and business confidence
Brazil is leading the global manufacturing recovery, while
Mexico continues to suffer an especially steep decline. PMI survey
data help to identify the causes of the divergence, which include
differences in exchange rates, business confidence and the pandemic
stimulus.
Although the JPMorgan Global Manufacturing PMI, compiled by IHS
Markit from its proprietary business surveys, rose from 52.4 in
September to 53.0 in October, its highest since May 2018, the
recovery of the manufacturing sector has by no means been
universal. Of the 31 countries covered by the surveys, factory
output rose in 22 but fell in nine during October. However, most
striking is the divergence between the two countries which have sat
at opposite ends of the PMI ranking table in recent months: Brazil
and Mexico.
In the three months to October, the manufacturing PMI output
index for Brazil has averaged 66.4, surpassing any rate of
expansion seen since the survey began back in 2006 by a wide
margin. By comparison, the output index for Mexico has averaged
just 40.2 over the same period, indicating a contraction of
production the severity of which has been exceeded over the past
decade only by that seen at the height of the pandemic earlier in
the year.
The PMI data also show that output in Brazil fell for just three
months at the height of the COVID-19 pandemic, between March and
May 2020, whereas Mexico's output has fallen continually since
March.
Brazil's manufacturers' have already recovered to above
levels of a year ago
The divergent performance is also reflected in the official
data, which are only available with a delay compared to the PMI and
hence only currently show the situation up to September. However,
these data already indicate that output in Brazil had risen 2.5%
above levels of a year ago whereas output in Mexico continued to
run some 5% below September of last year, corroborating the
divergent trends signalled by the PMI surveys.
Similarly, September's output in Brazil had recovered to a level
1.1% higher than in January while Mexico's production remained 3.5%
below that seen at the start of the year.
The differing recovery rates only partially reflect the depths
of the downturns at the height of the pandemic from which both
countries are recovering. In Brazil, output had collapsed by 31% in
April compared to its level at the start of the year whereas in
Mexico the slump was only slightly larger at 34%.
Virus containment
The different recovery speeds also do not reflect variances in
the degree and timing of lockdowns to fight rising COVID-19
infections, which have been similar.
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.
Both Mexico and Brazil locked down their economies to similar
extents between April and July. Although Mexico subsequently
relaxed some restrictions slightly earlier than Brazil, containment
measures are now less severe in Brazil than Mexico. The result is
that the average containment scores seen over the course of the
pandemic have been very similar: an average of 46.3 for Mexico (up
to November) against 46.8 for Brazil.
Exports and exchange rates
Digging deeper into the PMI sub-indices provides some further
insights into the causes of the divergent manufacturing output
trends.
One index that has shown in interesting divergence has been the
survey gauge of new export orders. While exports have now returned
to growth for two consecutive months in Brazil, rising in October
to the greatest extent seen in the 14-year history of the PMI
survey, Mexico's exports continued to fall at a rate only exceeded
over the past decade by the decline seen at the height of the
pandemic.
Brazil's superior export performance likely in part reflects the
depreciation of the real, which has plunged by around 35% against
the US dollar since earlier in the year; a far greater fall than
the 13% drop seen for the Mexican peso.
Rising domestic demand in Brazil
Importantly, not only has the currency fall made Brazil's
imports more competitively priced in foreign markets, the weakened
exchange rate has also raised the cost of imported goods, which has
led to import substitution as buyers favour cheaper domestically
sourced goods. Domestic demand consequently appears to have also
benefited, with overall new orders growth in Brazil running far
ahead of that seen for just export orders. The opposite is apparent
in Mexico, where domestic demand appears to be acting as a drag on
manufacturing alongside falling exports.
Business confidence
Another index, measuring business sentiment about prospects for
the year ahead, has also diverged especially markedly. Whereas the
number of companies expecting output to rise in the year ahead far
outstrips the number expecting a decline in Brazil, the number of
pessimists exceeds optimists in Mexico.
Business confidence in Brazil has generally run higher than in
Mexico since the economic reforms of 2016. In contrast, business
confidence in Mexico has shown signs of becoming increasingly
subdued, often linked to concerns over US trade policy as well as
the domestic political situation. Sentiment fell sharply in both
countries at the height of the pandemic, though notably remained
positive in Brazil.
A subsequent recovery of sentiment in Brazil in recent months
leaves the overall degree of confidence running above the post-2016
average, despite a slight dip in October, but in Mexico confidence
remains among the lowest seen over the past decade.
Sentiment has been boosted in Brazil in part by the benefits of
a weakened exchange rate, but also by an aggressive government
stimulus package designed to fight the negative economic hit from
the pandemic. The Brazilian government implemented support measures
to the equivalent of 11% of GDP expenditure, including income
support, job schemes, lower taxes and higher health spending.
This contrasts with a far smaller stimulus in Mexico, where the
government has sought to keep public finances under control,
limiting aid to loans to the most vulnerable households.
Outlook
IHS Markit is consequently expecting GDP to fall by 9.5% in
Mexico during 2020, but for a far smaller decline of 5.9% is
expected to be seen in Brazil. Growth of 4.3% and 3.6% is expected
respectively for 2021, but the larger expansion signalled for
Mexico is less impressive given the steeper downturn of 2020.
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.
