Are there Any Green Shoots Emerging from the Global Manufacturing Data?

  • Jun 03, 2020 AEST
  • Team Kalkine
Are there Any Green Shoots Emerging from the Global Manufacturing Data?

Summay

  • May 2020 Global manufacturing PMI data showed only slight contraction in output, as China reported growth, while downturn began to subside in most countries except Japan and Australia.
  • China’s PMI figures showed good signs of recovery in May 2020, as both manufacturing and service sector reported increased activity.
  • Eurozone also experienced rebound in production, while US Manufacturing PMI demonstrated deteriorating business activity and production levels.
  • Regardless, with the world witnessing steepest production falls in the last two months, duration and severity of virus containment and bounce back of business and consumer confidence plays an important role in charting out future global growth trajectory.

Amongst the economic indicators used by investors and analysts globally to evaluate growth opportunities and predict economic changes, the most important ones seem to be Gross Domestic Product (GDP), Employment Indicators, Consumer price Index (CPI), Central Bank Minutes and Purchasing Managers Index (PMI) for Manufacturing and Services sectors.

Mostly, all economic indicators evaluate historical data to draw conclusions, but economic surveys offer economists a peek into the future and help in predicting more reliable outcomes than only assessing the past events and performance. On the same lines, Purchasing Managers' Index (PMI) involves survey of purchasing managers across businesses in a particular sector, with two of the most well-known and widely considered PMI surveys being the manufacturing PMI and the services PMI.

Given that it is a well-integrated and connected world, analysts look at PMI surveys of different countries to gain understanding of the economic health, including sales, employment, inventory, and pricing insights.

In the present scenario, the health crisis caused by the outbreak of Covid-19 pandemic and the aggressive lockdown and social distancing measures has largely contracted economic activity owing to operational disruptions across all sorts of businesses. Thus, it is all the more crucial to track the PMI survey to understand where the global economy is headed and prepare for the same as an active market participant.

The manufacturing sector, in particular, is the first to reflect visible signs of a slowdown amidst crisis as production tend to react to consumer demand and is the first to get hit. Thus, to plan for the future production and investment opportunities, PMI survey is considered as a highly watched after economic indicator. Ver often, it is the first major survey to get released every month.

The Global manufacturing PMI for May 2020 reflects softer contraction in output worldwide, however, growth has been reported only by China while downturn did ease in most countries excluding Japan and Australia. But it is also noteworthy that in the past two months, the world saw the steepest decline in production, since the first quarter of 2009, as per ISH Market.

While there are signs of recovery and production has started to rebound with companies restarting operations to some extent, there is also a concern that the consumer demand is still subdued and continuing to fall despite easing of lockdown in different countries.

Especially, international trade has been badly hit as global exports have shown further deterioration during May 2020 due to slackening demand.

China – PMI Figures Present An Optimistic Outlook

China’s PMI data has shown some really optimistic signs of recovery for the month of May 2020, when the country recorded expansion in manufacturing and service sector activities as government policies to coordinate growth and control the COVID-19 pandemic worked well.

China Federation of Logistics & Purchasing (CFLP) and China Logistics Information Centre (CLIC) are responsible for compiling the Manufacturing PMI using the data collected by the National Bureau of Statistics (NBS). The questionnaires are sent out to around 700 manufacturing firms all over the country every month and the responses concerning their purchasing activities and supply situations are recorded for analysis. This largely helps various stakeholders in the decision making.

China’s manufacturing PMI was recorded at 50.6 per cent and the non-manufacturing business activities index was 53.6 per cent, both above 50 per cent indicating steady recovery in major industries during May 2020. Notably, an index value above 50 percent indicates a positive development in the industrial sector.

Besides, around 81.2 per cent of the surveyed manufacturing firms reported resumption of 80 per cent of their respective business operations in May 2020, as indicated by the NBS data.

In addition, China’s domestic consumption demand rebounded during the month and the sub-index measuring firms' expectations for business activities rose by 3.9 percentage points to 57.9, reflecting improved confidence among manufacturing firms.

Read: China’s Economic Outlook: Country faces double whammy of COVID-19 and trade war with the US

Eurozone – PMI shows easing in economic Downturn

As per the IHS Market data, business activity in countries across the 19-member euro zone region also bounced back in the month of May 2020 as companies began to restart operations after prolonged lockdowns and business disruptions experienced over the past two challenging months due to Covid-19.

Eurozone’s composite PMI increased from 13.6 in April 2020 to 30.5 in May 2020.

Unites States of America – Further decline in Output

IHS Market’s US Manufacturing PMI depicts that the ongoing crisis caused by the Covid-19 pandemic has further impacted production levels in May 2020 as compared to April 2020, and the new orders fell substantially due to weak client demand.

The US PMI increased from 36.1 at the start of the 2Q to 39.8 in May 2020.

Read: COVID-19 Aftermath: US Real GDP expected to shrink by 5.6% in 2020

Although, the contraction in the US manufacturing output was slightly softer in May, there was also a marked decline in total sales while negative sentiment towards the outlook for output over the coming year has driven employment down, as firms laid off employees and people lodged unemployment claims in millions of numbers. This, in turn, has forced suppliers to lower their prices amidst reduction in input buying and weaker overall conditions.

Now, as almost every country is strategically reopening its economy and easing restrictions, the positive PMI figures come as a relief to the market participants and companies, while it would also provide a push to the equity markets that have been absorbing momentum from improving investor confidence as various governments released trillions of stimulus and job support packages in Australia, the US, India, as well as other countries.

 


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