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Global Manufacturing: A V-shaped recovery

Guest Post by Ned Davis Research

Global manufacturing continued to show strong signs of recovery in September following the COVID-induced lockdowns earlier in the year, giving us further signs that the global recession is over. The global manufacturing PMI increased 0.5 points to 52.3 in September, its highest level since August 2018. It was the third straight month of expansion and the fifth successive increase in the index, albeit that smallest in
the sequence.

COVID losses recuperated

The latest reading in the PMI is historically consistent with 3.3% annual global industrial production growth, which is released with a several month lag. At the lowest point of the recession in April, production was down 12.3% from a year earlier. If these projected gains are realized in the coming months, this would suggest that the losses attributable to the shutdowns earlier this year have been completely recuperated.

The recovery in manufacturing, however, is in contrast to the larger services sector, which has been decimated by the pandemic. The global services PMI updates for September on October 5. However, preliminary readings for several large economies revealed renewed weakness in the sector last month as second waves of the virus impacted many of the world’s economies. This suggests that despite the strong manufacturing recovery, where social distancing is more feasible, the relative weakness in services argues against a V-shaped recovery for the broader economy.

More good news for manufacturing

Component and additional manufacturing indexes point to continued gains in the sector in the months ahead. The pace of production growth was little changed, hovering around its highest level since early 2018. But the new orders index, an indicator for future output, jumped 0.8 points to 53.6, the fastest growth since April 2018.

Moreover, new orders exceeded inventory growth by the most since December 2017, suggesting faster output in the coming months. The advancement should be broad-based by country, as over 90% of economies, the most in over two years, reported faster growth in new orders relative to inventories.

The future output index confirmed this rising optimism, jumping to its highest level since April 2018, well before the COVID crisis began.

New orders > inventories means more growth

Exports rebound

Export orders grew by the most since March 2018. This also marked the first expansion in exports in over two years, as the U.S./China trade war had already dented trade even before the COVID crisis. Moreover, export orders for all three broad sectors (consumer, intermediate, and investment) rose in tandem for the first time since May 2018.

Nearly two-thirds of countries reported rising overseas orders. Although this is a sharp improvement from the 0% reported in March, April, and May of this year, the share is still below pre-trade war levels.

Among countries, the sharpest export gains were reported in Germany and China, two of the world’s largest exporters, which are often criticized for their current account surpluses. These developments could potentially spark retaliation from the Trump Administration.

Prices pick up

The input price index rose to its highest level since December 2018, while the output price index climbed to its highest point since March 2019.

Leading the price gains by a long shot were Brazil and Turkey. Among developed economies, relatively higher input and output costs were observed in Canada, the U.S., and the U.K.

Recovery broadens
An increasingly larger share of economies saw their PMIs return to expansion territory in September. As shown in the chart at right, manufacturing output rose in 72% of the world’s economies, the most since December 2018. When this share has risen over 50%, which first occurred in July, it’s historically been associated with recession end.

The percentage of economies that reported month-to-month increases in their PMIs also picked up to 72%, the second highest share in three years and a sign that growth has accelerated among most of the world’s economies.

EMs in the lead

The Chinese recovery, which began around two months before the rest of the world, continued to charge ahead. The Markit/Caixin PMI, which is used to calculate the global aggregate, was little changed at 53.0, near its highest level since January 2011. The official PMI, which covers a broader survey base, climbed 0.5 points to 52.0, both the largest gain and highest level in six months. Within both reports, export orders grew at a faster pace.

But the emerging market recovery didn’t end there. Brazil and India, the world’s next largest emerging markets as measured by GDP, saw their PMIs jump to the top of the ranks. Notably, Brazil’s index rose to a record 64.9, while India’s jumped to 56.8, the best level in over two years.

South Africa, Turkey, and Vietnam also saw activity climb, more than offsetting continued declines in the rest of the ASEAN region, Mexico, and Russia.

As a result, the emerging market PMI rose to 52.8, the highest level since March 2011. Although developed economies have also recovered, emerging markets have outpaced their recovery. 

Most DMs recovering too

Manufacturing growth remained robust in the U.S. The Markit PMI edged up 0.1 point to 53.2, its highest level since January 2019. The ISM index pulled back modestly, but at 55.4, it’s still consistent with robust growth.

The manufacturing PMI for the eurozone powered ahead, rising 2.0 points to 53.7, its best level in over two years. Although most of the region’s economies saw faster growth, the gain was clearly led by Germany, which registered a 4.2-point surge to 56.4.

Conditions in the U.K. remained positive, but eased compared to the prior month, likely due to renewed concerns over the rising chances of a hard Brexit.

The manufacturing environment in Japan, however, remained dismal. Although the PMI picked up 0.5 points, the index held in contraction territory for a 17th straight month. Even though Japan did not experience as large of a COVID outbreak as other parts of the world, the economy entered the pandemic already in recession.

Global Manufacturing PMIs

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