Global Economic Growth Stalls; UK Manufacturing PMI Tumbles To September 2009 Level, China PMI At 10 Month Low
Two more indicators of a stalling global economy came out of China and the UK overnight, where manufacturing Purchasing Managers Indices posted substantial drops. Growth in the Chinese manufacturing sector slowed to a 10-month low in May, with both production and new orders gains moderating during the month, according to the final HSBC Purchasing Managers Index released Wednesday. The final May reading stood at 51.6, up from the May flash reading
of 51.1 reading but down from 51.8 in both April and March. Total new orders rose for the tenth consecutive month but at a slower pace than in April, while new export orders contracted for the first time in three months, though the rate of contraction was only marginal. This caused the pace of output growth to slow to a ten-month low, HSBC said. However, the pace of new employment rose at the fastest rate in five months. The rise in input price growth eased to a nine-month low in May. Yet the modest Chinese slowdown was nothing compared to the now confirmed stagflation gripping the UK, where Manufacturing PMI fell from 54.4 to 52.1 in May, weaker than consensus expectations (54.1) and its lowest level since September 2009. As Goldman reports, consumer-facing manufacturers registered the sharpest contraction in output on the month. Some of this is attributable to temporary effects; some may be indicative of more sustained pressure on household incomes. Nowhere was the impact of this more evident than on the GBPUSD pair which took a nearly 100 pip overnight tumble, and has weighed on European markets overnight. Other global PMI readings also confirmed that the world economic is approaching stall speed, which should certainly be favorable for global bizarro stocks.
Factory growth eased in Europe and Asia in May, surveys showed on Wednesday, feeding concerns that the world's main economic engines are cooling fast as richer countries curtail orders.
Purchasing managers indexes (PMI), measuring the activities of thousands of factories across the world, sank to multi-month lows in China and Europe, where even regional pacesetters France and Germany showed fresh signs of sagging.
The surveys for South Korea, India and Taiwan also showed the pace of factory activity easing, while U.S. figures due later on Wednesday are expected to complete the picture of global manufacturing surge that may be running out of stream.
Some slackening was expected as quake- and tsunami-damaged Japan struggled to churn out parts for the automotive and high-tech industries. Lacklustre growth and consumption in the United States and Europe have also restrained demand.
"I would be loathe to say there's a sharp slowdown in the pipeline, but some momentum seems to be lost," said Mark Miller, global macroeconomist at Lloyds Bank Corporate Markets.
The Markit Eurozone Manufacturing PMI for May slipped to 54.6 from 58.0 in April, its 20th month above the 50 mark that signifies growth but showing a sharp pull-back on fresh signs of decline in the currency bloc's debt-laden periphery.
Spanish manufacturers returned to contraction, while Italian and Irish factories saw a marked slowdown in growth. Supply-chain pressures dented the French and German PMIs, which had been hovering near all-time highs.
Survey compiler Markit described the declines in peripheral countries as worrying, suggesting they could face growing difficulty in cutting their enormous public deficits.
"In the case of the euro zone, some of the volatility you're seeing in government bond markets doesn't help, which is clearly a threat to growth via potentially higher longer-term interest rates," said Lloyds Bank's Miller.
Higher interest rates have already had a marked effect on growth in emerging Asia, where investors are nervously watching for any evidence that the slowdown there is worsening as central bankers tighten credit conditions to combat inflation.
Sure doesn't sound like the virtuous economic cycle that was supposed to be in place by the end of QE2...
And some more on the ongoing UK "stagflation" case from Goldman:
1. At the sectoral level, manufacturers in the consumer goods sector saw the sharpest contraction in both production and new orders in May, while producers in the investment goods sector slowed to a lesser extent. This partly corroborates the survey evidence cited by MPC members on the sluggishness of consumer expenditure. It is also consistent with a key feature of our macroeconomic forecast for the coming year: while we indeed expect consumer expenditure to remain muted (flat growth in 2011), we expect business fixed investment (forecast to grow at around 6% this year) to drive GDP growth.
2. The output and new orders components of the PMI both dipped below 50 in May, for the first time since mid-2009. Some part of this weakness is likely to prove temporary: according to Markit/CIPS, companies "noted that additional bank holidays during the survey period (which compares conditions in mid-May to those in mid-April) played a role" in weaker surveyed output. New export orders also eased, though companies reported strong demand from 'core' Euro-zone economies and the BRICs.
3. To the extent that the May decline in the UK Manufacturing PMI mirrors monthly falls in other national PMIs (Germany down four points, France down two points, Sweden down almost four points), this suggests that common factors - higher oil prices, weak demand in peripheral Euro-zone, supply-chain disruption following the Japanese earthquake - are also at work. But the additional weakness of the consumer goods sector in the UK suggests that the effects of a more exacerbated squeeze on household income must be closely monitored in the survey evidence over the coming months.
4. In other components of today's release, the signals were more mixed. Input and output price inflation moderated in May, but the levels of these indices continue to reflect companies' experience of elevated costs - particularly those of raw materials. The employment component of the PMI increased by half a point, and remains at cyclical highs.
5. Adding to today's weaker Manufacturing PMI, the CBI retail survey fell from +21 to +18 in May. If the PMIs for construction and services remain unchanged (due on Thursday and Friday, respectively), our monthly Composite PMI would edge lower from 54.4 to 53.9: consistent with around 2½-3% qoq annualised growth in GDP in Q2 (Chart 1).