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Global Growth Rebounds, Inflation Risks Rising

Guest Post by Ned Davis Research

Global economic growth rebounded in February, after reaching an 18-month low in the prior month, as the negative impact from the Omicron variant faded. The global composite (manufacturing and services) PMI (Purchasing Manager’s Index) jumped 2.3 points to 53.4. According to our calculations, the latest reading is consistent with 3.2% annual global real GDP growth.


The gain was broad-based, but greatly reflected a strong rebound in the services sector,
which had been most acutely impacted by the Omicron variant in January. Global COVID
case growth peaked in late January and has been in a sharp downtrend since then. Indeed,
businesses in both sectors were highly optimistic, with the composite future outlook index
rising to its second-highest level on record. While global economic conditions appear to be looking up, the recent Russia/Ukraine conflict and accompanying sanctions casts
a shadow on the outlook, as it will adversely impact global growth, inflation, and supply
chains. Since the altercation began late in the month, there is likely little impact of the event reflected in our February data. It is interesting to note that nearly all the economies that report preliminary estimates (mostly G7 countries) saw modest downward revisions to their month end numbers, led by the Europe, the region most impacted by the crisis.

Services strong

The global services PMI surged 2.9 points in February, the most since June 2020, to 53.9. The reading is in line with its long-term average, indicating that the sector is normalizing
and adjusting to COVID. New business growth picked up, boosted by a record reading
in the export index. Employment growth also accelerated.

Our breadth measure of the services PMI, which had fallen victim to Omicron in January, perked up significantly in February. The share of economies with services PMIs in expansion territory jumped over 30 points to 91%, the highest level since before the pandemic. Our monthly breadth measure surged to its best level since July 2020.

Manufacturing picks up

Global manufacturing activity also accelerated in February, as the PMI rebounded 0.5 points
to 53.6. Although down from its peak in mid- 2021, the PMI is still well above its long-term
average of 51.5. 

Most component and additional indexes increased. Growth in output and new orders accelerated, the latter to a four-month high. New export orders rebounded back into
expansion territory as nearly three-fourths of countries reported growing orders. Employment
growth and backlogs also picked up. The future output index soared to a 10-month high,
indicating positive prospects in the sector. Inventory growth slowed modestly. As a result,
concerns over the bullwhip effect, where businesses accumulate an excessive number
of inventories relative to new orders, eased somewhat.

Supplier delivery times continued to lengthen in February at historically stretched levels.
But it was at the slowest pace in 13 months. Although nearly all economies are experiencing
longer lead times, almost 80% saw them slow, the most since June 2020. This indicates
the easing of supply chain issues. The Russia/Ukraine crisis, however, could throw a wrench
in these positive developments.

Breadth strengthens

Our breadth measures of the manufacturing PMIs showed broadening growth trends. The
share of countries with PMIs in expansion territory picked up five points to 89%, a three month
high and a level consistent with strong economic expansion. The share of PMIs that rose on a month-to-month basis climbed to 57%, a four-month high.

Price pressures elevated

After a brief reprieve, global price pressures have edged higher. The global composite input
price index increased for the first time in three months in February but remained below its
record high. The output price index rose for a second month and is now just 0.3 points shy of
its all-time high in October.

Developed markets continue to face the brunt of higher price pressures, as the composite
price index jumped to a record. Conversely, the emerging market price index edged lower.

The sector price pressures have transitioned back to services, as consumers adapt to
COVID and shift demand back to the sector. The global services input price index jumped for the first time in three months, while output prices climbed to a new high. The global manufacturing input and output price indexes also rose in February but remain comfortably below their 2021 peaks.

As commodity prices surge and supply chains face disruptions due to the Russia/ Ukraine crisis, price pressures are likely to reassert themselves in the manufacturing sector. Coupled with the rising pressures in services prices, global inflation is likely to stay higher for longer.

China flat

Economic conditions in China were little changed in February, as the Markit composite
PMI held 50.1, indicating near stagnation. Services activity slowed to a near standstill as China’s zero-COVID policy continued to hammer the sector amid rising COVID cases. This was offset by
an acceleration in manufacturing growth, which has proved be more immune to the virus. The government’s official composite PMI also indicated subdued growth in the month of February.

U.S. strong

The U.S. composite PMI rebounded 4.8 points, the largest gain in nine months, to 55.9. Although down from its mid-2021 peak, the reading it still historically strong. Both the manufacturing and services indexes picked up, but the latter by a much larger degree as the Omicron wave subsided.

Europe rebounds

The eurozone composite PMI surged 3.3 points to 55.5, a five-month high. The increase was led by the services sector as COVID restrictions were lifted. The manufacturing PMI, while still historically high, edged down. All countries in the zone posted monthly gains, led by Italy. The
region, however, will face renewed downside pressure in the coming months as
it’s highly sensitive to the Russa/Ukraine conflict and its impact on energy and other resource prices. The U.K.’s composite PMI surged even more, rising 5.7 points to 59.9, an eight month
high, also led by the services sector.

Japan sputters

Japan continued with COVID restrictions in February as the world’s fastest-aging economy
struggles to protect its population, which has had few booster shots of the vaccine and limited hospital capacity. The composite PMI plunged to 45.8, a six-month low. Activity in the services sector contracted at its fastest pace since August, while growth in the manufacturing sector slowed.

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