economics

Global Economic Rebound Yet to Show as Manufacturing Weakens

Updated on
  • Purchasing manager indexes fall in euro region, Japan
  • Persistent weakness may delay end of ECB asset purchases
Photographer: Wolfgang von Brauchitsch/Bloomberg

The global economic rebound expected to happen this quarter is staying out of reach for now outside of the U.S.

After policy makers around the world were quick to shrug off weakness at the start of the year as a temporary phenomenon, their economies are keeping them in suspense, with purchasing managers indexes from Japan to the euro area hinting on Wednesday at a more protracted slowdown. Add risks including trade tensions due to U.S. tariffs, controversy over Iran policies and Italy’s struggles to form a government to the recipe of reasons for caution.

The upside is the U.S. showed signs of robustness. Its manufacturing index rose to 56.6 in May from 56.5, IHS Markit reported. A gauge of services rose to 55.7 from 54.6

All these elements will play into the thinking among monetary-policy officials as they look to unwind crisis measures. At the European Central Bank, news of less optimistic businesses and weaker growth in new orders, hiring and backlogs of work may delay a decision to scale back unprecedented support until officials can better assess economic health. In Japan, dwindling manufacturing momentum underpins the central bank’s commitment to add stimulus.

Also on Wednesday, the Federal Reserve publishes the minutes of its latest policy meeting, which will provide clues on how many more interest rate hikes are likely this year.


ActualSurveyPrior
Euro-area manufacturing PMI55.556.156.2
Euro-area services PMI53.954.754.7
Japan manufacturing PMI52.5N/A53.8
U.S. manufacturing PMI56.656.556.5

The euro fell to the lowest level since November after IHS Markit’s PMI estimate for the currency zone, and was down 0.6 percent as of 2:15 p.m. Frankfurt time. The Stoxx Europe 600 dropped the most in two months.

The Markit report attributed the latest weakness to the number of public holidays, after bad weather, strikes and a flu epidemic weighed at the start of the year. But the continued disappointing readings -- along with headwinds such as higher oil prices -- raise questions.

The figures “challenge the view that the economy is experiencing only a temporary soft spot,” said Anders Svendsen, an economist at Nordea Markets in Copenhagen. “The June meeting will come too early, and the ECB will wait until the July meeting before making the next important decisions on the future of its monetary policy.”

The weakness is less apparent in the U.S., which has been attributed in part to the boost from Donald Trump’s tax cuts. UBS Chairman Axel Weber, a former ECB policy maker, said Tuesday that this will help “drive the economy forward.”

“We know we’re late cycle, Europe’s rolling over, the U.K. is rolling over, the U.S. is doing fine because it’s got a fiscal shot in the arm and that’s a big part of the difference,” Michael Metcalfe, head of macro strategy at State Street Global Markets, said on Bloomberg Television.

Euro-Area Capacity Constraints

Shortage of labor and equipment increasingly limit manufacturing production

Source: European Commission

So far in Europe, policy makers are putting a brave face on the slowdown, saying there’s no sign of a durable softening in demand.

They are, however, paying close attention to the stock of orders at companies for any early warning signs. Data so far suggest that order growth is slowing because of constraints in equipment and personnel rather than sluggish demand -- a development that could be welcomed at the ECB as it might prompt companies to boost investments and raise prices.

“The economy is not the problem,” ECB Governing Council member Jozef Makuch said at a conference in Bratislava, pointing to political concerns over Italy and the U.S. “Global risks are present and this is the biggest challenge we’re facing.”

What Our Economists Say

“A deceleration of growth from the lofty quarterly figures registered in 2017 was bound to happen, but the slowdown is unlikely to stop the ECB from bringing its monthly asset purchases to a halt by the end of this year.”
--David Powell and Jamie Murray, Bloomberg Economics. Read there full analysis here

In Japan, manufacturing momentum slowed to a nine-month low in May, with employment growth and order intake weakening.

The latest figures will need to be factored in by those expecting a rebound this quarter, after the country snapped its two-year growth streak at the start of the year.

Key for Japan will be exports and the strength of world demand. The International Monetary Fund has forecast global growth of 3.9 percent this year, the fastest pace since 2011. Goldman Sachs economists, led by Jan Hatzius, are even more optimistic, and haven’t let the early wobbles sway them from their 4.1 percent prediction.

Yet risks have increased, and Europe looks like the weak link in the global outlook. While concerns over a full-blown trade war triggered by U.S. import tariffs have eased, the conflict remains far from resolved, and Italy’s populist coalition is rattling markets.

“You’ve had a very natural rebasing of expectations,” Daniel Morris, investment strategist at BNP Paribas Asset Management, said of Europe’s economy. “As always, we were perhaps carried away on the upside, now we’re swinging a bit too far in the other direction. We don’t want to get too pessimistic.”

— With assistance by Mark Evans, Harumi Ichikura, Daniel Tilles, Francine Lacqua, Guy Johnson, and Radoslav Tomek

(Updates with comment from ECB’s Makuch in 13th paragraph.)
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