Trade tensions hit manufacturing in developed nations, hurt biz sentiment
The flash PMI for the current month shows manufacturing momentum waning in the US and euro zone
Is the story of a synchronous recovery in the global economy developing leaks because of the trade wars? Not yet, but there are dark clouds on the horizon.
The flash Purchasing Managers’ Index (PMI) for the current month shows manufacturing momentum waning in the US and euro zone. The pace of new business orders is reducing, impacting their exports.
These economies together with Japan account for almost half of global GDP at current market prices. They hold the key to exports from emerging markets, which too will be affected if these economies slow down.
True, manufacturing PMI readings are above the 50 threshold—a reading above 50 indicates expansion, while a reading below that signals contraction. But the pace of expansion is slowing.
In the US, manufacturing production growth slowed for the second consecutive month in June. The Flash US Manufacturing PMI stood at a seven-month low of 54.6 falling from 56.4 in May. The latest upturn in new work was the softest since September 2017. Exports have shown the worst performance for over two years, the survey said.
Manufacturing output growth in the euro zone slipped to the lowest since November 2016. The Flash Eurozone Manufacturing PMI stood at an 18-month low of 55 in June down from 55.5 in May.
Factory order inflows rose at the weakest pace in 22 months, while export growth remained close to the lowest for over one-and-a-half years.
In Japan, while manufacturing activity expanded in June at a faster pace than the previous month, export orders contracted for the first time in almost two years.
Though improved service sector performance in these countries helped offset the increasing drag from manufacturing, the performance of the latter is poised to deteriorate. As a result, business confidence is fading.
“Risks are tilted to the downside for coming months. Business expectations about the year ahead have dropped to a five-month low, led by the weakest degree of optimism for nearly one-and-a-half years in manufacturing,” Chris Williamson, chief business economist at IHS Markit said while commenting on the US Flash PMI data for June.
In the euro zone, the future output expectations dropped to a 19-month low. “Manufacturing is looking especially prone to a further slowdown in coming months, with companies citing trade worries and political uncertainty as their biggest concerns,” said the survey report.
According to Joe Hayes, economist at IHS Markit, with geopolitical risk aplenty, haven demand for the yen remains a downside risk to Japan’s manufacturing exporters.
In short, while the trade wars are yet to affect the developed economies in a big way, future expectations have turned gloomy.
This downbeat sentiment is seen in global equity market investors pulling out significant amount of money from equity funds.
The latest report by fund-flow tractor EPFR Global showed that Japan, Europe and Global Equity Funds posted outflows ranging from $1.9 billion to a record-setting $8.11 billion for Global Equity Funds. But the outflows haven’t affected US Equity Funds so far.
This is because global fund managers anticipate strong earnings performances from American companies.
In fact, investors are selling EM equities to buy US equities, said a recent survey of global fund managers by Bank of America Merrill Lynch.
That said, expectations for global economic growth, which began the year on a high note, have cooled in recent weeks as higher energy prices, the steady tightening of US monetary policy and trade tensions have sapped momentum, the EPFR report added.
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