EARLY INDICATORS POINT TO STARK DIFFERENCES IN ECONOMIC STRENGTH
Mark Lister, 28 January 2021
Some of the first economic indicators for 2021 were released last week. These made for interesting reading and highlighted the fact that some of the world’s largest economies have started the year on a very different footing.
There is a plethora of regular information for economists and market strategists to follow. Inflation, GDP and unemployment figures are some of the highest profile, but purchasing managers indices (PMIs) can be one of the most telling.
These measures are the result of business surveys about how output, new orders, employment and prices are tracking. They are useful predictors of where growth is headed, and they’re timelier than almost anything else so they help us take the pulse of the world economy in real time.
The breakeven level is 50, which means that activity is no better or worse than it was a month earlier. A reading above that points to growth or expansion, while anything below 50 signals contraction.
Late last week the first PMIs for January were released, and the divergence between Japan, Europe, Britain and the United States was stark.
Japan’s fell to 46.7, which is the twelfth consecutive month overall activity has worsened.
Europe held up better, although the overall measure still slipped to 47.5, driven by a weak services sector as virus-related lockdowns in late 2020 continued to bite.
While economic conditions in Japan and Europe looked mediocre, it was the UK that stood out for all the wrong reasons.
UK private sector output experienced its steepest fall since May last year. The third national lockdown has clearly hit the service economy hard in recent weeks, with the services PMI falling to an eight-month low of 38.8.
Weaker export orders and supply chain challenges contributed to the slowdown, with supplier delivery times rising by the most since the survey began almost 30 years ago (apart from the month of April last year).
On a better note, the US economy is very much a relative bright spot, as has been the case for several months now.
The US measure for January increased to 58.0, well in expansionary territory and only just below the five-year high that this measure hit in November.
Expansion rates in business activity accelerated at both manufacturers and service providers, with goods producers registering the strongest upturn in output since August 2014.
At the same time, inflationary pressures continued to build, with supply delays and goods shortages pushing input prices higher.
There are a number of things we can learn from these early indicators.
Japan and Europe remain in a funk, although it is the UK that is really suffering from the ongoing effects of COVID-19 and the associated lockdowns. Despite putting Brexit behind it, challenges remain and the British pound could remain under pressure in the months ahead.
In contrast, the US is still head and shoulders above many other parts of the world, at least in terms of its economic performance.
Another important inference is that cost pressures are emerging in many places. Some of these could prove temporary, such as the supply chain blockages and the need for additional precautions and personal protective equipment.
However, any sustained increase in the inflationary outlook will be important for financial markets, as well as central bank policy, so this is certainly something to keep a close eye on.
A notable omission from this commentary is China. The world’s second biggest economy - and the biggest export market for both New Zealand and Australia – hasn’t yet released its January PMIs. These will come next week, so let’s hope they have more in common with the US than the UK.