The rate of growth in global industrial production has slowed during the past couple of months (see chart attached). This slowdown is still relatively modest, and mostly as a result of the earthquake induced disruptions in Japan during March and April.
Production in emerging markets has handsomely out-performed developed markets and has also held-up relatively well compared with developed economies, but the risks are firmly to the downside. This downside risk is highlighted by the fact that the JPMorgan Global Manufacturing PMI fell for the third consecutive month in May. And although the index remains above 50 (at 52.9) and has been above 50 for 23 successive month, the index is currently at its lowest level since September 2010.
The weakest part of the latest global PMI reading was obviously the massive and unexpected drop in the US PMI (ISM) index in May. The US ISM fell by almost seven points to a 20-month low of 53.5 in May.
Among the other major industrial regions covered by the JPMorgan survey, rates of improvement eased in the Euro-Area (seven-month low), China (weakest since July 2010), the UK (20-month low) and India (4-month low). This weakness is likely to reflect more clearly in the global production data in the coming months (as industrial production data is lagged).
Clearly, policy officials, analysts and business leaders are all trying to assess just how soft the current ‘soft-patch’ is. This is crucial for the setting of near-term economic policy. A few examples: how does the Fed approach the ending of QE2 in a couple of weeks? This week the Australian Central Bank appears to have backed-away from their recent hawkish tone, citing concerns about the pace of the recovery. Do analysts revise down economic growth and company earnings’ estimates, which could further undermine the already weak performance in the equity market? Do business leaders further delay potential expansion and employment plans?
A broad range of economic data has clearly weakened recently (see previous eco-minutes). It is however unclear how much of this is due to transitory factors, such as the March earthquake in Japan, or due to a more significant softening that reflects the impact of higher commodity prices, including oil and food, combined with still fragile confidence levels within banks, businesses (especially small business) and consumers. The data is inconclusive.
It is encouraging, however, to see that the Japan PMI rose sharply in May, to signal a slight overall improvement in manufacturing conditions, following the earthquake-affected readings in March and April.
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