Pick-up in global manufacturing driven by delivery times + BoE holds fire (for now)

Global Macro: Global manufacturing PMIs flattered by long delivery times

Over the past few days, manufacturing PMIs for October were published for a wide range of developed markets (DMs) and emerging markets (EMs). For the first time since May 2021, the global manufacturing PMI showed an improvement – driven by EMs –, albeit a marginal one, rising to 54.3 (from 54.1 in September). We should add, though, that key sub-indices like output, future output, new orders and exports all came down compared to last month, particularly for DMs. Meanwhile, the global subindex for delivery times dropped by 1.7 point to a record low of 34.8 (indicating longer delivery times), with delivery times particularly long in DMs (aggregate DM index 24.3). This highlights the longer than expected persistence of supply side bottlenecks (see our October Global Monthly for more background and analysis). These are currently forming the key headwind for global manufacturing, while also posing upward inflation risks. The global PMI subindices for input and output prices rose to recordhighs in October, driven by a renewed surge in commodity prices.

"It’s the supply side, stupid!"

While supply-demand imbalances in global manufacturing also relate to a post-pandemicstrong demand for goods (particularly in the US), driven by accommodative fiscal and monetary policies, the stickiness of supply is visible in a wide number of markets: semiconductors and other industrial inputs/commodities, transport, labour etcetera. In general we expect these supply side issues to have faded by the end of next year, while we expect a post-pandemic shift in demand from goods to services – assuming services sectors normalizing, with vaccination rates edging up further. Some early signs of easing – for instance in the prices for gas and some other commodities, in shipping rates and in the lead times for semiconductors – lend some support to this view. Still, we should be a bit careful in generalizing these supply side issues, as the dynamics differ from market to market, and are partly country-specific. Moreover, the future persistence of these issues still depends on many uncertain factors, such as the degree that workers will return to the labour market – as government support programmes are being unwound – or the extent that future Delta flare-ups add to bottlenecks in for instance global shipping or country-specific truck transport.

UK: BoE holds fire (for now)

The MPC decided 7-2 to keep its policy rate on hold today at 0.10%, in line with our expectations, but against market and a split in consensus expectations. However, the MPC also indicated in the accompanying meeting minutes that “it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.” This was confirmed by projections in the Monetary Policy Report of CPI inflation under different policy rate scenarios, which showed inflation remaining above target through 2024 in a no-change scenario, whereas inflation comes back to target if rates follow the path currently priced in by financial markets (which suggests Bank Rate rising to 1% by end2022). While inflation is elevated and there are indications of significant labour market tightness in the UK, there remains uncertainty over how much additional slack the end of the wage subsidy (CJRS) scheme will generate, and this is likely the main reason the MPC held fire today. All told, we continue to expect the BoE to raise rates by 15bp at its 16 December policy meeting, followed by a further 25bp hike in H1 22, taking Bank Rate to 0.50%. Thereafter, we expect a cooling in inflation to stay the MPC’s hand. See here for more.