Global manufacturing: Still downbeat

Global manufacturing PMI drops back in October, remaining in contraction mode

Over the past week, October manufacturing PMIs for various developed markets (DMs) and emerging markets (EMs) have been published. After having risen for the first time this year in August/September, the global manufacturing PMI dropped back to a three month’ low of 48.8 (September: 49.2), remaining below the neutral 50 mark separating expansion from contraction. This was mainly driven by EMs, with the aggregate EM index falling back by 0.8 point to 50.1 (September: 50.9) led by China (see here for our take on China’s October PMIs) and India. The aggregate index for DMs picked up marginally, to 47.5 (September: 47.4), although remaining clearly in contraction territory. Amongst DMs, the October manufacturing PMIs stayed at relatively low levels for the UK (44.8) and the eurozone (43.0), including for the Netherlands (43.8).

In our earlier publications, we already downplayed the chances of a sharp rebound in global manufacturing, given that we still expect a slowdown in the US, and ongoing economic sluggishness in the eurozone. We added that stimulus to investment via the US’s Inflation Reduction Act and Europe’s recovery fund may help to offset (to some extent) the drag from weaker consumption. A bottoming out of domestic demand in China, following ongoing piecemeal monetary easing and the stepping up of targeted support, particularly for real estate, should also help.

Supply conditions still stronger than demand conditions

Looking at the subcomponents of the global manufacturing PMI, the output subcomponent fell by almost a full point to 49.0 (September: 49.8), driven by EMs (mainly China and India). The demand-side subcomponents were more stable in October, but are still weaker: the new orders component picked up moderately to 48.6 (September: 48.4), while the export orders sub-index fell back slightly to 47.5 (September: 47.6). The fact that supply conditions still look stronger than demand conditions is also consistent with our global supply bottlenecks index. Our index remains clearly in ‘supply abundance’ territory, although it has moved back a bit towards ‘neutral’ in recent months. The global subcomponent for input prices picked up for the fourth consecutive month in October, to 53.1 (September: 52.7), whereas the output prices component fell moderately to 51.5 (October: 51.7). In any case, both these two bellwethers for industrial goods’ price pressures remain well below the peaks seen during 2021 and 2022.

Composite PMIs a less reliable indicator than in the past

It should be noted that, for advanced economies, the composite PMIs (a weighted average of the output indices for both manufacturing and services) have been a less reliable signal for activity in the post-pandemic era. In particular over the 2021-22 period, they had become almost a contrarian indicator – signalling contraction when there was expansion, and vice versa. More recently, the signal from the composite PMIs seems to be more consistent with the broad trend in activity, though in the eurozone for instance, it still seems to be signalling much deeper declines in activity than we are seeing in GDP (see chart below). In the US, manufacturing is a much smaller driver of the economy than services, and so the manufacturing PMI has never been a strong predictor of activity (the services PMI was a good predictor before the pandemic, but not since then). Overall, given that there has been some improvement in the predictive power of the PMIs in recent months, it is possible that over time their relationship with GDP will continue to normalise.