From a worsening of Germany’s already abysmal manufacturing slump to a flagrantly bad early read on exports for South Korea, Monday brought dour news for the global economy.
The looming recession in Germany is grabbing all the economic headlines, and rightfully so. The commentary that accompanied the heinous manufacturing PMI for September was pretty bombastic.
“The manufacturing numbers are simply awful”, Phil Smith, Principal Economist at IHS Markit said Monday of the latest PMIs out of Germany.
But perhaps more disconcerting was the early read on South Korean exports, which are set to drop for a tenth consecutive month in September.
First 20-day shipments dove 22% from a year earlier, data out Monday showed, an astonishingly bad print from the global demand bellwether. Exports to China dropped 30%, while semi shipments plunged 40%.
In one way or another, South Korea is caught in every major geopolitical cross-current, from the trade war (evidenced by the export slump) to the rising tide of nationalism (see the worsening spat with Japan) to Donald Trump’s adventures in dictator diplomacy (the US president’s on-again/off-again fling with Kim Jong-Un is a continual source of uncertainty for Seoul).
Recall that inflation in South Korea flat-lined last month. In July, the BOK slashed its economic forecasts in the course of cutting rates, and the country has struggled mightily in the face of global trade frictions. Jitters about a turning of the semi cycle have made things worse. Early last month, the Kospi garnered the dubious distinction of becoming the worst-performing major equity benchmark in the world. The diplomatic row with Tokyo is just insult to injury.
“Slumping global demand has hurt South Korea’s corporate investment and hiring, putting the economy on course for the slowest expansion since the global financial crisis”, Bloomberg wrote Monday, adding that “as the US-China trade war shows no sign of ending, South Korea’s feud with Japan over export restrictions has deepened, hurting confidence in Asia’s key supply chain”.
Meanwhile, down under, Australia’s September flash manufacturing PMI printed in contraction territory at 49.4 from 50.9 in August. Output fell to 48.3 from 51 and new orders dipped.
Although the composite and services gauges returned to expansion in September, the sub-50 read on the factory gauge likely underscores the case for more RBA easing.
“The divergence in the readings on the manufacturing and services sector is somewhat unusual, though not unprecedented”, Commonwealth Bank senior economist Gareth Aird said, adding that “the dip in the manufacturing reading was a touch disappointing, particularly given the ongoing weakness in the Australian dollar”. He did call the overall numbers “an encouraging result thanks to a pickup in the services sector”.
Coming back to Europe, it wasn’t just Germany that disappointed on Monday. PMIs for France missed across the board too. The manufacturing PMI printed 50.3 (estimate was 51.2), while the services gauge missed consensus by a mile, coming in at just 51.6 versus estimates of 53.2.
That services print was well below even the most pessimistic prediction from 19 economists.
To be sure, France’s numbers weren’t the train wreck seen in Germany, but considering August’s “green shoots“, they weren’t exactly inspiring either. “With services firms registering their slowest rise in activity since May, fears of negative spill over effects from the manufacturing sector are coming to fruition”, Eliot Kerr, an economist at IHS Markit said, in the course of warning that “any intensification of such effects would likely dampen economic growth going forward”.
If Monday’s data is any indication, the nascent rebound in economic sentiment that helped bond yields bounce off their August nadir might be seen in hindsight as something of a false dawn.