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July's upcoming PMI survey data will be eagerly assessed for
clues as to recession risks and the persistence of elevated
inflation rates.
Economic growth resilience under scrutiny
June's PMI output data had broadly come in below expectations,
with a notable
exception of mainland China, raising concerns that the
cost-of-living crisis was dampening global growth more than
anticipated -particularly in the US and Europe. Forward-looking
indicators such as new orders, the output-orders differentials,
orders-inventory ratios and future expectations indices all sent
even gloomier signals, suggesting that output growth will cool
further as we head into the third quarter.
While China and, to a lesser extent, Japan had reported improved
economic performances in June, the July data will shed some light
on the extent to which these gains simply reflected the reopening
of these economies after Omicron or whether a more encouraging,
fundamental improvement in demand is taking place. Expectations of
the latter are especially low for China, where July has seen the
reimposition of COVID-19 containment measures in some cities.
Employment gains unlikely to be sustained
While the survey's output and new orders indices will therefore
provide an update on economic growth trajectories at the start of
the third quarter, it will be also important to ascertain the
direction of travel for capacity utilization, employment,
inventories, supply chains and of course prices.
June had seen global employment growth generally holding up
well, with many firms continuing to rebuild workforces that had
been affected by the pandemic. However, as chart 3 shows, the
persistence of such robust employment growth would be unusual given
the recent cooling of demand growth. We will therefore be watching
the survey gauges on new orders, backlogs of orders and employment
to gauge the extent to which hiring is likely to persist in coming
months and whether jobs growth might already be cooling amid
concerns over recent demand growth.
Changing inventory focus
The moderation of demand growth - and in the case of
global manufacturing a stalling of demand growth - had already
led to a marked change in inventory management in June, with
factories increasingly moving away from inventory building for
safety and supply resilience concerns towards cutting inventories
in response to weaker than expected sales (see chart 4).
The number of producers worldwide that have been cutting
inventories of inputs due to lower-than-expected sales has in fact
risen to the highest since the global financial crisis. Eyes should
therefore be focused on how these inventory levels are changing, as
this can exacerbate changes in final demand and affect supply
chains.
Supply conditions and prices
It is already evident that the deteriorating demand outlook had
led to lower prices for many commodities, notably oil and copper,
with a further lowering of prices triggered in part by the June
PMIs. Hence, we would expect to see these lower industrial price
pressures help to soften the inflation picture in July. Oil
futures, for example, have fallen by around 20% since the June PMI
data were collected.
Key to the price outlook, however, will be the supply situation.
Although global supplier delivery times lengthened in June to the
smallest degree since November 2020, shortages remain prevalent and
continue to hand pricing power to the seller in many cases. As
such, the PMI suppliers' delivery times index will be a major
barometer to watch in terms of supply chain pricing power.
The surveys' broader indicators of price trends will also need
to be monitored to assess the pass through of higher energy, wage
and material costs through to the consumer. Recent months have seen
a broadening out of the inflation picture, with initial price rises
for goods passing through to services to the extent that, in May
and June, global service sector input cost inflation exceeded that
of manufacturing.
However, more encouragingly, there have
been signs of input cost inflation starting to cool which, on
the back of recent commodity price falls, could gain momentum in
July to add to tentative hopes of a peaking of inflationary
pressures.
United States
June saw the
S&P Global US composite PMI fall to a five-month low of
52.3, and the second-lowest since July 2020. The service sector
output gauge has lost considerable momentum while manufacturing
growth has stalled. Most worrying is the new orders index, which
signalled the first decline in demand for goods and services for
two years. This index paints the gloomiest picture of the US demand
environment since the global financial crisis barring only the
initial pandemic downturn in early 2020. Not surprisingly, the
consensus according to Refinitiv estimates, is for both US
manufacturing and services growth to weaken further when the flash
estimates are published on 22nd July.
While June saw US inflation surge to a 40-year peak of 9.1%, the
US PMI's input cost index - which tends to lead changes in CPI
inflation - turned sharply lower. Although signalling still
elevated inflationary pressures, any further cooling of cost growth
in the July PMI survey will bode well for CPI in the coming
months.
With the FOMC expected to hike by 75 basis points (bp) or more
at its July meeting, the flash PMI data will help understand the
likelihood of further policy tightening through the second half of
the year and into 2023. Note that the futures markets are already
pricing in rate cuts in 2023. Any significant worsening of the
demand picture and associated cooling of price pressures could see
some further revising of interest rate expectations.
Eurozone
Economists are also anticipating weaker PMI numbers to come out
of the eurozone when the flash data are issued on 22nd July.
Manufacturing output contracted for the first time in two years in
June and the expansion in service sector activity cooled
considerably, easing most notably for consumer-facing services.
June's headline number covering manufacturing and services of 52.0
was consequently the lowest since the lockdowns of February 2021.
However, as with the US PMI data, it was the forward-looking
details which caused most consternation.
As chart 10 illustrates, even the reduced rate of output growth
outpaced order book growth in June to a degree rarely seen, and
indicative of economic growth weakening in the third quarter as
companies adjust to weakened demand.
A more severe weakening is signaled for eurozone manufacturing
alone, as depicted by the survey's new orders/inventory ratio,
which has fallen to a level only ever before seen during the
initial pandemic lockdowns and the global financial crisis.
Eurozone companies also scaled back their business expectations
for output over the coming year to the lowest since October 2020.
Both the stagnation of demand and worsening outlook were widely
blamed on the rising cost of living, tighter financial conditions
and concerns over energy and supply chains linked to the Ukraine
war and ongoing pandemic.
Price pressures meanwhile remained elevated at levels not seen
prior to the pandemic, though a moderation of cost growth for a
third successive month in June hinted at a peaking in the rate of
inflation.
The flash PMI data will follow a day after the ECB announces its
latest policy decision, for which at least a 25 basis point hike
has been pre-announced (its first rate rise for a decade), to be
followed by another 50bp hike at the following September meeting if
the data support such a move. The flash PMIs will therefore be in
the spotlight in terms of the guidance on whether the data are
conducive to an increasingly aggressive ECB tightening path.
United Kingdom
The July UK flash PMI comes after the June survey showed
surprising resilience in terms of output, with the final reading of
the headline composite PMI in fact rising from 53.1 in May to 53.7
in June. However, this index was running over 60 back in March,
underscoring the severity of the UK's recent downshifting in its
growth rate. As seen in the US and the eurozone, the UK also saw a
worrying deterioration in the leading indicators, notably new
orders and future output expectations, both of which have slumped
to levels which have historically tended to be commensurate with
economic decline (see chart 14).
Like the US and eurozone, the UK is seeing a natural moderation
of growth after the initial reopening of the economy from
Omicron-related health precautions. However, like the US and
eurozone, the UK is also experiencing its worst cost of living
crisis for four decades, which saw CPI rise at an annual rate of
9.1% in May. There were some signs in the June survey data that
hinted of the rate of inflation potentially peaking soon, but it's
clear that inflationary pressures remain especially elevated in the
UK, with the survey's input cost gauges running ahead of that seen
in the eurozone and US.
The July UK PMI data come after the Bank of England has chosen
to hike interest rates at each of its last five meetings, albeit
not yet risking anything higher than a 25bp rise. However, three of
the nine policymakers voted for a 50bp rise at the latest meeting,
and recent rhetoric has generally become more hawkish as the Bank
grows more concerned about inflation expectations. The July data
will therefore set the scene for the August 4th MPC meeting, and in
particular reveal whether - like the FOMC and ECB - tightening
policy is adding to recession risks. Economists are expecting only
a modest slowing the pace of expansion, according to Refinitiv
data.
Japan
Policymakers at the Bank of Japan will have meanwhile been
encouraged by the sharper pace of economic recovery signalled in
June by the PMIs, but would have also noted the further
acceleration in firms' selling price inflation.
The flash au Jibun Bank composite PMI™ rose from 52.3 in May to
53.2 in June (later revised to 53.0), its highest level since last
November and the fourth-best reading since the start of 2014.
June's improvement pushed the average PMI reading for the second
quarter up to 52.2 against 48.7 in the first quarter, signalling a
return to growth for the economy after GDP contracted 0.1% at the
start of the year.
However, any doves could point to the fragility of the demand
situation and in particular worrying reliance of the economy on
what could prove a temporary rebound in demand for services, which
could soon ease as pent-up pandemic demand fades. A key concern is
the prospect of a renewed downturn in manufacturing, with June
already seeing output growth almost stall and forward-looking
indicators such as the orders-inventory ratio turning down
further.
A steep rise in firms' selling prices in June meanwhile
suggested that consumer price inflation has further to rise.
Headline CPI reached 2.5% in April and May with the core rate up to
2.1%, the latter exceeding the Bank of Japan's 2% target for the
first time since 2015. However, these rates are clearly well below
those of the US and Europe, and have been a key reason why the yen
has come under pressures against the US dollar, with BoJ
policymakers intent on focusing on the need for potential stimulus
if conditions deteriorate, rather than tightening policy.
Summary
In summing up what to look out for with July's PMIs, and the
flash numbers in particular, we bring attention to the demand
environment in the developed world's four major economies, as
indicated by the PMI's new orders index. When mapped against
central bank policy decisions, as in chart 20, it is clear that
policymakers are in unprecedented territory, tightening policy in a
demand environment which has already turned gloomier to a degree
that would already being flashing warning signs of recession. The
trend in new orders in July will therefore be critical in assessing
the extent to which these recession risks have changed.
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.
