Global Manufacturing: The Canary in the Coal Mine

The Purchasing Managers Index (PMI) is a forward-looking indicator based on monthly surveys of purchasing managers. As a “Diffusion Index”, values above 50 indicate expansion relative to the previous month, and below 50, contraction relative to the previous month.  As such, it is a key piece of the economic puzzle. There are several PMI indices: manufacturing, services and composite.  In this piece, the focus is on PMI Manufacturing

The PMI Manufacturing surveys (Table 1), with a few exceptions,  indicate a deteriorating manufacturing environment both at the global and national levels.  India is the only country in this sample of major advanced and emerging markets to point to expansion.  The US, Brazil and France are on the cusp and going in the wrong direction. Manufacturing in the eurozone, China, S.Korea and Taiwan are experiencing contraction. Within East Asia, Taiwan is showing the greatest contraction. Within the eurozone, Germany is at its lowest point in 28-months.

Table 1:     Global PMI

The deterioration in the global manufacturing sector is also reflected in the slowdown in trade in the past few months (Figure 1).  Global trade in goods rebounded strongly after the peak of the pandemic. Imports and Exports rose by respectively 10.3% and 11.3% in 2021.  These trends slowed down in the first months of 2022, with exports from the top 10 trading countries (which account for 80% of global GDP and 75% of world trade volume) rose by 2.6% and 1.8% respectively in the first and second quarter of 2022. Moreover 7 out of the 10 countries experienced a sharper slowdown in the second quarter.  There is no more recent data at the global level, but the latest data for important trading nations such as South Korea and Taiwan show a decline in volumes in recent months. Similarly, data on ports and shipping confirm the negative trend.

Fig.1.  Global Trade Trends

The slowdown in manufacturing comes in the midst of an unprecedented tightening of monetary policies. The U.S. Federal Reserve raised its benchmark interest rate by 75 basis points (0.75%) to 3.75-4.00% on November 2, followed by the Bank of England raising its benchmark also by 75 basis points, to 3.0%. The global economy is in the crosswinds of faltering manufacturing and continued monetary tightening. Other harbingers of slowing economies are the sharp drops in commodity prices, in particular crude oil which has dropped by 4% in the past month. These forces lead us to raise the probability of a global recession centered on the eurozone, the UK and to a lesser extent the United States in the first half of 2023.  At the very least, we will see a manufacturing contraction in that period.  The question is how bad does it have to get to lead to central banks to pause or slow down the monetary squeeze. The answer so far seems to be that we’re not there yet.