Another day, another deluge of potentially worrisome economic indicators.
To be sure, the PMI data out of Europe wasn’t all bad, but it continues to paint a picture of a bifurcation between services and manufacturing, with weakness in the latter indicative of the global slowdown narrative.
The flash Eurozone Manufacturing PMI printed 49.2 for February, down from 50.5 in January. That’s a 69-month listless nadir. New orders fell to 46.2, the lowest since April 2013 and the fifth consecutive month of contraction. “The weakness [in Europe] is being led by manufacturing, which has now entered its first downturn since mid-2013″, IHS said, adding that “with factory order books deteriorating at an increased rate, the rate of contraction in the goods producing sector will likely worsen in coming months.”
In Germany, the flash Manufacturing PMI came in at 47.6, down from 49.7 in January. That, folks, is a 74-month low. New orders printed at just 42.6, the fifth straight month of contraction and the worst reading since August of 2012. “As well as the contraction in output, the fall in the headline manufacturing index also reflected negative contributions from the new orders, stocks of purchases and supplier delivery times components, with the latter showing the first decrease in input lead times for almost three years in February”, IHS said.
On the bright side, services appear to be holding up well, and that helped the composite numbers to beats in Germany (52.7 vs. 52 expected), France (49.9 vs. 48.9 expected) and in the Eurozone as a whole (51.4 versus 51.1 expected). “Overall growth was centered on the service sector where activity also rose at the fastest pace in three months amid an improving picture in Germany and stabilization in France, IHS remarked, before delivering the following overall take on the prevailing economic backdrop:
The Eurozone economy remained close to stagnation in February. The flash PMI lifted only slightly higher during the month, continuing to indicate one of the weakest rates of expansion since 2014. The survey data suggest that GDP may struggle to rise by much more than 0.1% in the first quarter.
Solid domestic demand in many countries, notably Germany, continued to help support service sector growth and offset the downturn of the manufacturing sector. However, the overall rate of service sector growth remained relatively moribund compared to that seen throughout much of last year.
Remember, crashing external demand has the potential to be particularly pernicious for Europe. Recall the following excerpt from a BofAML note out earlier this month called “The world is still flat”:
As Table 1 shows, external demand was a countercyclical buffer for these economies when they were in recession. Exports continued to grow at a decent pace, offsetting some of the weakness in domestic demand. Remarkably, the external sector has been the only source of growth for the Euro area economy since 2011: the growth rate of the rest of the economy has been zero. Looking further back, exports also played a countercyclical role in South Korea during the Asian crisis of 1998.
So, yeah – let’s hope domestic demand holds up in the bloc assuming the outlook for the rest of the world continues to deteriorate.
Speaking of that, Japan’s Manufacturing PMI dove to a 32-month low of 48.5 in February, data out Thursday showed. Here’s what IHS Markit Economist Joe Hayes had to say about that:
Survey data for Japan’s manufacturing sector ebbed into negative territory in February, reflecting sharper reductions in demand and production. Although the initial Q4 estimate revealed a bounce back in economic activity, the PMI suggests underlying business conditions are unfavourable. This was further highlighted by output expectations turning negative for the first time in over six years, which comes as no surprise given the international headwinds Japanese manufacturers are facing such as a China slowdown and the global trade cycle losing further steam. Unless service sector activity can offset manufacturing weakness, the chance of Japan entering a recession in 2019 looks set to rise.
Right. And this comes hot on the heels of trade data out Wednesday which appeared to paint a rather bleak picture and also betrayed the extent to which the BoJ has been further pigeonholed into perpetual easing.
Speaking of lackluster export data that suggests the external demand picture in Asia is deteriorating fairly rapidly, South Korea said exports dove 12% in the first 20 days of February. China-bound shipments fell 14% in the first 20 days of the month, the Korea Customs Service said Thursday. That’s actually better than last month, but it nevertheless underscores the notion economic activity is faltering “bigly” in part thanks to the trade tensions.
All of this is just further evidence of the “synchronous global slowdown” story and you have to think it will light a fire under monetary policymakers unless you, like BofAML’s Ajay Singh Kapur, suspect they just don’t get it.