PMI may signal the start of global downturn

Global manufacturing surveys show the global manufacturing economy slowed in August, and again in September. In August, the Global Manufacturing PMI or Performance of Manufacturing Index was at a 21 month low, falling to 52.5 points. This is still above its average and remains pointed towards expansion, but the softening has clearly commenced.

Coupled with the decline in the survey-driven PMI*, Chinese factory activity slowed in September, due in large part to the uncertainties and pressures of the ongoing and escalating trade dispute with the USA. Notably, in September, manufacturing also slowed in Vietnam, Taiwan and Indonesia.

However, it was not just Asia that saw manufacturing decline. European manufacturers reported similar declines, though potentially for more localized reasons.

A downturn in manufacturing, if sustained, would flow through to Australia, including potentially forestry and wood products sectors. Reduced manufacturing means lower demand (or price) for commodity inputs.

 As Sarah Turner wrote in the Australian Financial Review on the 4th October:

“With many of Australia's largest companies exposed to the ebb and flow of global growth, notably mining, energy and transport plays, the slowing of activity in the world's factories needs to be added to the growing number of risks confronting investors that include higher US interest rates, elevated valuations and simmering geopolitical tensions.”

There are suggestions that sustained prices for some key commodities indicate manufacturing downturns are likely to be short-lived, but one of the difficulties that cannot be avoided is that uncertainty is not good for consumption driven economic growth.

* PMIs are diffusion indexes and are closely correlated to economic growth. They operate with 50.0 as a neutral position, meaning numbers below 50 represent contraction and numbers above 50 indicate expansion. The more distant from 50, the greater the contraction or expansion of a manufacturing sector.