Global Manufacturing Growth Shudders Towards a Halt
This months manufacturing PMI data only confirm what several months of prior surveys (and now the latest US jobs report) have been telling us, namely that growth in the developed economies is getting scarcer and scarcer, and harder and harder to come by. Following a brief brief period of stabilisation, which lasted roughly from November last year to this January, conditions have been steadily deteriorating in manufacturing sectors across the planet, with the deterioration being lead by an ongoing decline in new export orders. Roped in together through the various trade channels, the worlds industrial base is now, even in the best of cases, barely eking out growth, as can be seen in the fact that the JP Morgan global index registered a mere 50.6 in May, only marginally above the 50 no change level.
“Germany’s manufacturing output continued to lurch downwards in May, with the resilience of the first quarter now giving way to the steepest drop in production levels for almost three years. Weaker global economic conditions resulted in shrinking order inflows, especially from export markets. The latest drop in new work from abroad was the fastest for six months, which manufacturers linked to softer demand within Europe and signs of a slowdown in Asia”.
“Things went from bad to worse in the Spanish manufacturing sector during May. Rates of decline in output and new orders are now faster than at any time in the past three years. The ongoing lack of demand in the sector is mainly reflective of domestic problems, but the weakness in the rest of the eurozone was also reported to have weighed on demand in May. All of this provided a further squeeze on the labour market as the rate of job shedding remained marked.”
“It is hard to beat the bad news conveyed by much deeper than expected GDP contraction in the first quarter of this year and in this sense the weakening PMI comes as no surprise. But the PMI index still points to downside risks in the coming quarters. The outlook for growth keeps getting worse. Higher than expected German GDP growth in 1Q12 failed to support the Czech economy while, most recently, the leading indicators, ZEW and Ifo, have deteriorated and caught-up with the weakening PMI trend. Indeed the Czech May PMI collapsed to a 33-month low driven by the new orders and the new export orders. Exports growth was stable in the first quarter of 2012 but would have likely slowed in the second quarter adding to downside pressure on growth. The outlook for the manufacturing sector has deteriorated sharply in the last couple of months following Nov-11 to Mar-12 recovery”.
“Manufacturing sector growth almost stalled in May, after a notable improvement in April due to a very subdued rise in output volumes and a minor contraction in new orders. New export orders, on the other hand, showed a slight improvement, suggesting that the slowdown in economic activity is driven more by moderating domestic demand, while Turkish exporters continue to successfully diversify geographies for trade”.
As the report says:
“The latest rise in new orders was the fifth in as many months. Companies mainly attributed new order growth to better demand from domestic sources. Although only slight, the overall increase in new orders contrasted with a further decline in new work received from overseas clients. Goods producers commented on muted demand from China and Europe”.
“Activity in the Indian manufacturing sector kept up the pace in May with output, quantity of purchases and employment expanding at a faster pace. New orders decelerated slightly led by domestic orders and stock levels rose, suggesting a slight moderation in output growth going ahead”.
Commenting on the final PMI data, Chris Williamson, Chief Economist at Markit said:
“The final PMI data confirm the earlier flash reading showing growth in the U.S. manufacturing sector to have slowed in May. The sector nevertheless continued to expand at a reasonable pace, growing at an annualised rate of around 3%, and should contribute to sustaining steady though unspectacular economic growth in the second quarter”.
Further South, May data signaled a second monthly decline in both output and new orders at Brazilian manufacturers. Nevertheless, at 49.3, unchanged from April, the PMI was only slightly below the neutral threshold suggesting only a modest deterioration in Brazilian manufacturing business conditions. Firms working in Brazil’s manufacturing sector generally linked the deterioration in operating conditions to weak client demand. The volume of new orders received by companies fell for the second consecutive month in May, albeit the decline was only modest and to a lesser extent than in April. Meanwhile, new export orders also fell during May, with the rate of decline solid and the strongest in 2012 to date.
“The HSBC Manufacturing PMI index remained unchanged at 49.3 in May. This is the second consecutive month where the manufacturing PMI has been below 50 (after above-50 readings in the first quarter), and reinforces the perception that Brazil’s manufacturing sector is going through a particularly difficult time, squeezed between rising costs on one side, and competition from imports on the other.
One Easy Reading
There is one simple, easy and unequivocal message to be garnered from all this – the Euro crisis needs to be settled and resolved in the shortest time possible. This won’t be easy, but it has to be done. What was once a small localised crisis with its epicentre in Greece, having spread to the entire Euro Area is now extending beyond the frontier of the monetary union, and threatening the entire recovery on a global basis, as investors loose their appetite for risk fearing the arrival of another Lehman moment. Naturally, the problem isn’t only the Euro, most developed economies are overleveraged and struggling under the weight of legacy debt.
Meanwhile China offers another warning. Simply pumping up demand in unsustainable quantities in areas like construction may bring short term export advantage for the West, but in the longer term the problems produced make the process hardly worth the effort, a point which could well be borne in mind when thinking about policy towards the India’s, Turkey’s and Brazil’s of this world, where short term capital flows have pumped up consumer credit in undesirable ways. Since these countries have started increasing credit from a very low base, the threat is hardly dire at this point, but warnings should be heeded. With domestic mortgages at something like 5% of GDP Brazil is somewhere near where Spain was in 1992. No big deal, but imagine the process is allowed to continue unchecked, and then look where Spain is now, or rather was when the bubble burst in 2007, a mere 15 years later.
7 Responses to “Global Manufacturing Growth Shudders Towards a Halt”
I don't know what you mean by the Euro crisis needing to be "settled and resolved". How do you imagine that could work?
I see a huge overhang of debt that the private sector is no longer willing to refinance and expand, and thus economies that are shrinking as credit contracts. I see no near-term solution to this problem. Writing off debts would be the quickest solution, but very traumatic, and politically it seems almost impossible, at least in the near term. I don't see any way Europe could reconfigure itself into something more federal in the middle of a crisis. So that leaves a continuation of the present course: muddling and increasing reliance on central bank refinancing. I don't see what else is really on offer.
the only thing that has ever worked was the Marshal Plan. As an American and having been through what i've been through in the last few years "i think i'll wait for the smoke to clear" first before recommending anything be done to help "the Civilized Continentals." Still…something will be done…that much i can guarantee you.
"I don't know what you mean by the Euro crisis needing to be "settled and resolved". How do you imagine that could work?"
Well, I have nothing very new in mind. The situation hasn't changed much since the crisis started. My opinion is that either the Euro Area moves towards full economic and political union or the whole thing falls apart – see my Wolfson prize essay.
So resolving the crisis involves taking concrete and very specific steps. Banking union is one of them, the debt redemption fund could be another. Full fiscal union backed by the issuance of Euro Bonds could be another. The average debt public level of the whole Euro Area is not that high by international developed economy standards, and certainly well below that of Japan.
Europe's banking system is extremely leveraged, and interlinked. This means deleveraging is inevitable. It also means that is any part of the system collapses then the rest will directly feel the impact. Maybe Europe's leaders are finally waking up to this bit.
"So that leaves a continuation of the present course: muddling and increasing reliance on central bank refinancing. I don't see what else is really on offer".
I think what is being talked about at present goes quite a long way beyond LTROs. Naturally it probably won't be enough. The thing is I think Germany is finally waking up to the fact that if Greece is forced out, then the German economy can be one of the worse affected due to the pack of cards nature of the situation.
I don't think resolving the "Euro" aspect of the crisis solves the whole issue, look at Japan, but I do think it would mean the problems could be treated in a different way.
Naturally, the banking and sovereign funding issue is only one leg of the problem, the growth problem is just as big on the periphery. Some sort of money printing backed Marshall aid type grant programme would be needed to help the countries on the periphery to restore competitiveness without devaluation. This wouldn't be easy, but subsidising export oriented employment generating industrial activity in the South would be a start. Perhaps all this sounds pie in the sky, and perhaps it is, but the Germans have their backs to the wall, and they will have to decide. If disintegration of the Euro Area is the choice, then the sort of problems I am talking about in this post will be small beer.
Barf, I agree, it will have to be some kind of Marshall Plan. I am NOT certain it will happen though. Something serious has to be done about undoing the harm of earlier policies rapido, or the political systems in the South will seriously start to fall apart.
Why does nobody takes seriously the possibility of abolishing fractional-reserve banking? It seems to me that it's pretty obvious that none of this could have happened with a full-reserve banking system where in order for somebody to invest somebody else has to abstain from consuming. The money supply remains stable and interest rates are transparent, reflecting the actual demand and supply of savings. On the other hand, with fractional-reserve banking, what we have is a falsified interest rate that conveys misleading information. The real wonder is that it's taken so long for the whole thing to blow up in our face.
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You cannot abandon fractional reserve banking as there is already to much paper money in the system. If you contract that amount of paper from the market what you will have is a global crash. The only viable option is for banks to write off interest from the loans. That however is not a solution as the next loan will start the huge interest again. In any event if you abandon interest rates then who is going to invest in banking unless we all start moving towards Sharia banking.