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Preliminary PMI survey data showed only a modest impact from the
Ukraine war on current economic growth in the world's largest
developed economies in March. Headwinds from the invasion, soaring
energy costs, a broader rise in cost pressures and ongoing supply
chain constraints were largely offset by a boost from the further
reopening of economies from COVID-19 related containment
measures.
However, business confidence for the year ahead slumped sharply
lower, most notably in Europe, and a further intensification of
price pressures and supply bottlenecks arising from the war looks
set to worsen the global cost of living crisis.
The survey data therefore point to an increased risk of slower
growth and higher inflation in the months ahead. However, much will
depend on the extent to which the waning pandemic will continue to
boost economic activity and offset the headwinds from rising
geopolitical uncertainty and inflation.
Developed world growth accelerates as economies
re-open
Business activity continued to grow strongly across the G4
developed economies of the US, eurozone, UK and Japan in March,
with the preliminary 'flash' PMI survey's signalling the fastest
rate of expansion since November of last year.
The upturn was led by the service sector, where activity growth
accelerated for a second successive month from the near-stagnation
caused by the Omicron wave in January. Service providers reported
the strongest growth for four months as economies continued to open
up from COVID-19 containment measures. Despite a tightening of
lockdown measures in mainland China, virus containment restrictions
worldwide in March were the lowest since the pandemic began in
early-2020, providing a major boost to consumer-facing services and
travel and hospitality in particular.
Manufacturing growth also accelerated, reaching the highest
since last August, likewise buoyed by rebounding demand as well as
some easing of supply chain constraints compared to those seen in
the second half of last year.
Only US sees stronger growth
The United Kingdom recorded the strongest
growth of the four largest developed economies for the third month
in a row in March. Despite seeing a slight moderation in the rate
of expansion, UK output growth was among the strongest recorded in
the history of the survey, reflecting a rebound in the service
sector fueled by the near-complete removal of pandemic
restrictions. However, a slowing in the rate of expansion was
primarily linked to dampened demand arising from concerns over the
Ukraine war and associated exacerbation of existing cost of living
pressures.
Similarly, eurozone growth lost some momentum,
first and foremost reflecting the impact of the war on confidence
and prices, but also reflecting weakened manufacturing growth due
to worsening supply chain bottlenecks due to disrupted supply out
of Ukraine.
United States growth, in contrast, accelerated
to an eight-month high in March, reviving further from the
Omicron-induced slowdown seen at the turn of the year. Few survey
respondents reported any immediate impact on output and demand from
the Ukraine war, instead generally citing the opening up of the
economy as having boosted growth of demand and output in both
manufacturing and services. Like the UK and eurozone, US has seen
covid restrictions relaxed to the lowest so far in the
pandemic.
In Japan, output fell for a third month running
as the country continued to battle against the new COVID-19 wave,
though the rate of decline moderated to register only a marginal
contraction thanks in part to virus-fighting measures not being
raised further during the month.
Ukraine war hits business confidence
While Russia's invasion of Ukraine had only a minor adverse
impact on business output across the four largest developed
economies in March, its impact was more evident on business
confidence. Across the G4, business expectations of output in the
coming 12 months slumped to the lowest since December 2020, sliding
in all four economies but most notably in the eurozone. Future
expectations hit 17-month lows in both the eurozone and UK, with
14- and five-month lows recorded in Japan and the US
respectively.
Anecdotal evidence from the surveys revealed that the invasion
had exacerbated existing concerns over supply chains, prices and a
potential slowing of economic growth as the pandemic rebound
faded.
Inflation rates hit all-time highs
The surveys also revealed widespread reports of higher costs
resulting from the war, notably for energy, which added to existing
steep input costs pressures resulting from the pandemic. Across the
G4, input costs rose at the steepest rate since comparable data
were first available in 2009. Near-record highs for input costs
were seen in the US, Japan and UK while a new 25-year high was seen
in the eurozone. Importantly, while all four economies continued to
see strong manufacturing costs pressures, new records were seen for
service sector input cost inflation amid rising energy, transport
and wage costs.
These higher costs fed through to raised selling prices, the
rate of inflation of which also hit a new all-time high across the
G4 economies on average. Selling price inflation rates hit new
peaks in the UK and eurozone, with a near-record increase again
seen in the US, though inflation remained more muted in Japan,
mainly blamed on subdued demand.
Supply chain delays worsen again
A further ramification of the Ukraine war was a worsening of
supply chain delays in the eurozone, which is closest to the
conflict. Having shown signs of easing in recent months, eurozone
suppliers' delivery times lengthened in March to the greatest
extent since last November. Delivery delays also rose in Japan,
linked in part to new lockdowns in China.
More encouragingly, delivery delays eased in the US and UK, to
the lowest since January 2021 and October 2020 respectively,
largely due to an easing of pandemic-related supply bottlenecks.
However, in all cases supply chains lengthened to degrees that have
not been seen prior to the pandemic outside of unusual events, and
an overall increase in supply delays across the G4 on average hints
at sustained elevated material price pressures in the coming
months.
Policy tightening
With the PMI data signalling stronger economic growth and rising
inflationary pressures in March, at face value the surveys bolster
the case for further monetary policy tightening, especially in the
case of the US and UK.
However, the big question for policymakers in the months ahead
will be the extent to which the further reopening of economies and
the fading of the pandemic provides a sufficient boost to offset
the headwinds of the uncertainty and price hikes caused by the
Ukraine war, as well as the existing cost of living crisis, the
trend towards tighter monetary policy and reduced fiscal stimulus
relative to the emergency pandemic measures. Given the slide in
business sentiment captured by the surveys, the risks seem tilted
towards slower economic growth but rising inflation in the months
ahead.
Chris Williamson, Chief Business Economist, S&P
Global Market Intelligence
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.
