Stagflation Goes Global Again - UK And China Join Worldwide Manufacturing Slowdown
It seems that the global economic decline is not limited to the Japapense maanufcaturing base: as expected in a globalized world, manufacturing weakness has now spread to both China and the UK, whose PMI indices are both fractionally above stagnation. On China: "China's official Purchasing Managers Index fell to a 28-month low to 50.9 in June, (below expectations) with the imports index tumbling to 48.7, the lowest since August 2010. It was followed shortly after by the HSBC China manufacturing PMI for June, which slid to 50.1, marking the lowest level since the second quarter of 2009. The drop was sttributed to: "falling liquidity levels, higher interest rates and shrinking tighter
credit availability." Which means that the PBoC will be forced to act to rekindle its industrial base even as prices are still not under control and the upcoming inflation print is expected to come north of 6%. The UK's own PMI also was below expectations, coming at 51.3 on consensus of 52 and below May's 52.3 "The CIPS Manufacturing Purchasing Managers Index (PMI), a composite index measuring manufacturing activity, came in at 51.3 in June, down from a revised 52.0 in May, hitting its lowest level since September 2009...UK manufacturing sector activity growth has slowed dramatically in the CIPS series since early 2011. In February the headline index posted 61.5, matching January's record high for the series. In March the manufacturing PMI posted 56.4, then 54.4 in April, then the revised 52.0 in May, its lowest reading since September 2009. Now it has fallen to 51.3 in June, just 1.3 points above the 50 stagnation level." As a result the central banker dilemma is now at its peak, as the banking cartel is unclear if it should hike rates and stimulation inflation, or further lower and cause outright stagnation. As we said a few weeks ago, this is what centrally planned stagflation looks like. But luckily we have the US, whose Chicago ISM is expected to once again indicate a reverse decoupling is the name of the game for a few months, as despite a global economic contraction, the US is somehow growing, despite the end of QE2 and no fiscal stimulus anywhere on the horizon.
Some observations from Goldman on the UK PMI:
BOTTOM LINE: The Manufacturing PMI fell from 52.0 to 51.3 in June, against consensus expectations of a small increase to 52.3. This is now the lowest level of the headline index since September 2009 and the fifth consecutive decline since the series' record high of 61.9 in January. The output subcomponent increased in June, but the body of evidence - from other PMIs across Europe as well as the Bank's Agents' survey - suggests that a slowdown in the global industrial cycle and ongoing supply-chain disruption from the Japanese earthquake constrained UK manufacturing output last month.
1. Despite an increase in the output sub-component in June, from 50.0 to 52.7, the headline Manufacturing PMI fell from 52.0 to 51.3. New orders contracted again, but at a slower pace (moving from 48.3 to 49.5) and employment growth slowed by almost five index points from 56.1 to 51.6. According to Markit, the weakness of new orders reflected "subdued domestic market conditions and slower growth of new export orders." Though demand from Asia, Europe and the US increased, many firms reported that a slowdown in global economic growth restricted the inflow of foreign orders.
2. The declining momentum in our Global Leading Indicator (GLI, Chart 1) corroborates this softening external environment. The decline in other European PMIs in June (the Euro-zone down 2½ points, Sweden down 3 points, Switzerland down 5½ points, Chart 2) also suggests that a common - rather than UK-specific - shock is driving the slowdown in manufacturing growth. While the increase in the UK output sub-component in June may well be due to fewer public holidays in this survey period versus the last, the June Bank of England Agents' survey suggested that ongoing supply-chain disruption from the Japanese earthquake posed an additional headwind. The Bank reported last month that: "Output in the automotive sector was significantly below normal following the earthquake in Japan and the consequent impact on the supply of some key components. And there had been reports of disruption to output in other areas reliant on Japanese electronics." As the temporary disruption from the earthquake is unwound, we would expect upward pressure on the UK Manufacturing PMI in the coming months, though the sequential slowdown in global GDP growth may prove more powerful.
3. Also of note, the input price component of the Manufacturing PMI fell sharply in June, from 71.4 to 60.9, partly reflecting a reduced in oil prices over the month. To the extent that this presages an easing in CPI inflation (Chart 3), this will underline the majority of the MPC's stance that current high spot inflation is temporary.
4. On a quarterly basis, the Manufacturing PMI has fallen from 59.8 to 52.6 in Q2, its lowest reading since the recovery began in mid-2009. We now have two inputs into our Composite PMI for June (the CBI retail survey fell sharply in June). If the PMIs for construction and services come in in-line with consensus, this would imply a two point decline in our quarterly Composite PMI from 55.9 in Q1 to 53.6 in Q2. On past correlations, this is consistent with GDP growth of around 2½qoq annualised (Chart 4).
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