Flash Manufacturing PMI, May 2023: The flash estimates of the Purchasing Managers’ Index (PMI) for the UK manufacturing sector showed an acceleration in the rate of decline in activity with a reading of 46.9 – its lowest of the year and the 10th month in a row that it has been below the crucial 50 level.
Worryingly, output fell for the 3rd consecutive month, driven largely by subdued order books and customer de-stocking; some respondents also mentioned the extra bank holiday as a factor. The fall in new orders for manufacturers accelerated this month, with export business recording its sharpest drop for 4 months.
We see something similar in the overall results for the Euro-zone where the manufacturing PMI fell to 44.6, its lowest reading for 3 years since the initial impact of the Covid-pandemic. The output element of the index was at a 6-month low with an increasing divergence between services and manufacturing with the largest gap since January 2009. Orders also fell sharply in the Euro-zone but the index was also helped down by a further shortening of suppliers’ delivery times.
Flash estimates at the country level within the Euro-zone are only produced for Germany and France; perhaps not surprisingly given its size, the manufacturing PMI for the former of these two countries also fell to a 3-year low at 42.9, with the pace of decline in output also accelerating as it did for the Euro-zone overall. Order backlogs in Germany fell at their fastest rate since last November reflecting both weak demand and a further improvement in material availability. The picture is slightly different for France, although only in detail with the manufacturing PMI still firmly in negative territory despite edging up to 46.1 in the flash estimate for May – output also improved slightly while remaining well below the crucial 50 level.
Outside Europe, only Japan and the USA have flash PMI estimates with the former seeing the flash estimate for manufacturing move up to 50.8 – this is the first positive reading since last October, with both output and new orders rising in contrast to the position in the UK and Euro-zone. The USA saw its manufacturing PMI move in the opposite direction with the reading of 48.5 representing a reversal of the (just) positive figure recorded for April. However, output was still growing in May, albeit at a slower pace than the previous month, as firms worked through order backlogs, with new orders falling at the fastest pace for 3 months with overseas demand especially weak.
These reports are available on the “PMI by S&P Global” website at https://www.pmi.spglobal.com/Public/Release/PressReleases or on request from MTA.
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European Commission Economic Forecast, Spring 2023: The European Commission (EC) has released its full economic forecast and the key headline, at least for the EU as a whole, is that with help from slightly stronger growth in 2022 compared to the November expectations, growth in 2023 has been upgraded but with almost no change to the outlook for 2024. They now predict growth of +1.0% for EU GDP (+0.3% in the November 2022 forecast), with +1.7% for 2024 (was +1.6%).
We see a similar pattern for almost all of the individual countries, although the extent of the improved outlook does vary. Inevitably since this forecast covers the 27 EU countries, plus Japan, the UK and the USA in detail and summary forecasts for the candidate countries (this includes Turkey), EFTA (including Switzerland), China and Russia, we can’t go through them all in this brief report, soi we will focus on a couple of the key drivers. We would suggest that the main interest would be to look at individual countries, especially the smaller ones which are not covered by our global machine tool forecast.
The growth outlook has improved with a better-than-expected start to 2023 for the EU economy but inflation is projected to remain high this year despite the key positive change underpinning this forecast being the further fall in energy commodity prices.
An important terms-of trade countershock arising from higher prices for imported energy products is making its way through the economy and higher policy interest rates and increased risk perception are leading to a further tightening in financial conditions. Tighter financing conditions will weigh on investment, but countervailing factors are at play.
With inflation and higher interest rates eroding consumers spending power, consumption is set to remain subdued in 2023, but then rebound in 2024 on the back of employment growth and progressive recovery in real wages. The slowdown of core inflation is set to be more gradual than previously projected despite falling natural gas prices and is expected to be above the headline figure in both 2023 and 2024.
The phasing out of discretionary policy is expected to drive further improvements in the fiscal balance of governments, although some countries will still have an expansionary stance over the next couple of years. External balances are set to improve significantly due mainly to a fall in imports associated with prices moving back towards their pre-conflict positions.
The balance of risks to the overall forecasts has tilted back to the downside with eh persistence of core inflation emerging as a key risk. This would restrict the purchasing power of households which could be hit further by increased risk aversion in the financial sector causing a further tightening of lending conditions.
The key assumptions assume that there will be persisting geo-political tensions arising form the Russian invasion of Ukraine and the existing sanctions against Russia will remain in place for at least the next couple of years (the forecast horizon). As in the previous forecast, a large number of people from Ukraine are expected to remain in the EU with their integration into the labour market continuing through this forecast.
No impacts from the Covid pandemic are expected in this edition but there is a change in terms of financial stability. Since the previous forecast, Silicon Valley bank (and two others in the US) had collapsed, as well as the problems (and subsequent take-over) of Credit Suisse. The Commission assesses these as having been one-off shocks but warns of the possibility of further stress emerging, especially given rising interest rates.
The full report, which runs to 212 pages including the statistical appendix, can be accessed on the European Commission’s web-site at https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts_en (select Spring 2023).