The Global Manufacturer

PNC Economist Sees Global Growth Gaining Traction

Despite many challenges, the world economy is closing 2013 with at least modest signs of improvement. Bill Adams, senior international economist for PNC Financial Services Group, offers this quick scorecard of some of the world’s major economies and their manufacturing sectors:

UNITED STATES: Manufacturing is strengthening in the U.S. and abroad in late 2013, possibly creating demand in the global industrial supply chain to absorb some of the increase in inventories reported in the first estimate of third quarter GDP growth. The ISM manufacturing report in November was the strongest yet in 2013, and the Markit manufacturing PMI was the strongest since January; by contrast, the ISM non-manufacturing index moderated from October. Other indicators look okay: Construction spending rose 0.8% in October after a 0.3% decline in September, and ADP’s report of private sector payrolls rose by 215,000 in November.

JAPAN: Industrial production rose 0.5% in October from September, and was up 4.7% in year-ago terms, moderating slightly from September’s 5.1% year-ago growth. Sentiment surveys point to stronger manufacturing, softer service sector activity in the fourth quarter: the Markit/JMMA PMI rose to 55.1 in November, the highest level since July 2006, from 54.2 in October, while the non-manufacturing PMI retreated to 51.8 from a record-high 55.3.

CANADA: Real GDP increased at a 2.7% annualized rate in the third quarter, close to the United States’ 2.8% annualized growth; Canadian household consumption and business investment were strong, and Canadian businesses made large additions to inventories in the third quarter, lifting GDP growth. Trade was a drag on growth in the third quarter as exports of mined products and aerospace manufactures fell, partially offset by rising energy exports.

With Canadian growth pretty good and the unemployment rate trending down, this economy is on track for a rate hike near the end of 2014. The signal from the good GDP release was reinforced by the RBS manufacturing PMI in November, holding nearly the strongest level in two years.

EUROZONE: The flash estimate of CPI inflation was a 0.9% year-ago increase in November, up slightly from October’s 0.7%.

Record high unemployment outside of Germany will put downward pressure on wages and service prices in 2014, likely holding CPI inflation uncomfortably below the ECB’s target. Sentiment surveys remain strong: The European Commission’s economic sentiment index hit another recovery-to-date high in November; the Markit manufacturing PMI was up slightly to 51.6 from October's 51.3, close to the flash estimate; The Eurozone manufacturing PMI in November was the highest since June 2011, and PMIs for several Eurozone member countries hit multi-year highs: Austria, Germany, the Netherlands, Italy, and Greece.

CHINA: Stronger surveys: The HSBC manufacturing PMI was 50.8 in November, basically unchanged from October's 50.9. The CFLP manufacturing PMI likewise held steady at 51.4, tied with October 2013 for the strongest month since May 2012, and the HSBC non-manufacturing PMI rose to 52.3 from 51.8.

MEXICO: Manufacturing is recovering, construction is not. Construction output fell a large 1.4% in September from August, a sixth straight month of decline, and was down 7.5% from a year earlier. Employment in construction fell 7.9% in September 2013 from September 2012.

While the downturn in construction has persisted longer than expected, it still seems most likely that the Mexican government gets public works spending back on track eventually, supporting a revival of real GDP growth to 3.0-3.3% in 2014. The HSBC Manufacturing PMI for Mexico rose to 51.9 in November from 50.2 in October, reaching the strongest level since March 2013, and paralleling stronger manufacturing surveys in the United States and Canada. The IMEF manufacturing and non-manufacturing indices likewise rose to 50.1 and 50.4 respectively in November from 49.2 and 50.2 in October; adjusted for firm size, the manufacturing index rose, while the non-manufacturing indicator moderated slightly.

BRAZIL: Since much of the last two quarters’ volatility was due to a bumper crop in the spring raising second quarter agriculture output and a reversion to more normal conditions in the third quarter, the decline in GDP does not seem like the start of a substantial downturn; industrial and service sector output both rose modestly in the third quarter from the second. In year-ago terms, real GDP growth in the third quarter was 2.2%, and averaged 2.4% in the first three quarters of 2013, up from 1.0% per annum real GDP growth in 2012.

INDIA: Growth in India is stabilizing, although it remains far below trend. Real GDP growth recovered to 4.8% in year-ago terms in the third quarter of calendar year 2013 from 4.4% growth in the previous quarter. The stabilization was broad based, with growth accelerating in agriculture, service, and utility sectors.

This stabilization is particularly noteworthy given that it occurred despite the shock to the Indian economy of a weaker rupee and spiking interest rates in the third quarter. Survey data also suggests that the recovery has continued in the fourth quarter: The HSBC manufacturing PMI for India rose to 51.3 in November, the first reading above 50 since July, and the non-manufacturing PMI rose to 48.5 from 47.5. But risks to Indian growth, and to the rupee, remain to the downside with the roughly one in three risk of a sovereign credit downgrade to below investment grade status threatening.

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