The latest readings of the Purchasing Managers’ Index (PMI) suggest that the recovery in the main developed economies is ongoing, while the manufacturing sector in most of Asian economies is experiencing a contraction. The US is leading the recovery with PMI readings which have remained steadily above 50 for the last five years. Also, economic growth in the US has remained around to 2 percent annually, and in spite of the disappointing beginning of 2015, the outlook of the economy remains strong. In the euro zone, the recovery is weaker but solid, as the latest manufacturing PMI readings of 52.5 suggest. Moreover, services PMI is registering even higher readings, and scored 54.4 in June. Japan is the developed economy with the most uncertain outlook, and its manufacturing PMI has remained only timidly above the no-change threshold as of late. (Please see graph below for more information)
PMI gives information about the performance of the private sector, usually divided between manufacturing and non-manufacturing. This measure gives almost real-time information, allowing to have a timely notion of current economic growth, before the release of official GDP figures. More specifically, PMI tracks variables that can easily be quantified, such as output, stock levels, new orders or employment, and blends them into a single index which informs about the evolution of the sector. When PMI readings are above 50 they suggest that the sector is accelerating, and the larger the number the faster the growth in the sector. The combination of the manufacturing and non-manufacturing measures will give a complete idea of the evolution of most economies, and will enable to make informed predictions of their growth rates.
The manufacturing sector in Asia is undergoing a period of stress, with the exception of India. China, the largest Asian economy, has been scoring weak PMI readings in the lasts years, and the gauge currently suggests a weakening conditions in the sector. China’s fragility is affecting other Asian economies through the trade channel. For instance, weakness of export orders is one of the main reasons behind the weak PMI readings of Indonesia and South Korea. In the case of Malaysia, however, internal weakness is the main driver behind the contraction of its manufacturing sector.
India, the third largest Asian economy, is the only significant bright spot in the continent as of now. It is one of the fastest-growing economies of the world and its government brought renewed confidence due to the promised economic reforms. However, the confidence on India’s performance has lost part of its thrust. After the new government took office approximately a year ago, PMI started a gradual recovery which reached its climax in June 2015 at 54.5.
But since then, the sector’s conditions have been on a downwards trend. India’s outlook is promising but the pro pro-growth reforms that the government has implemented so far are insufficient. Quick and profound policy action is needed. Unlike China, where deceleration is a byproduct of the needed plan to restructure the economy and achieve a sustainable growth path, India has the opportunity to initiate a virtuous cycle that should lead to a stronger manufacturing sector and economic growth.
Prepared by Jordi Rof
Economist at Asiya Capital Investments Company