Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.
The non-manufacturing/services PMIs released for February 2011 continued to build on the already robust levels and are reminiscent of the robust manufacturing PMIs. The JP Morgan Global Services PMI rose to 59.3 from 58.2 in January.
The non-manufacturing sector in the U.S. continues to forge ahead with the ISM non-manufacturing PMI coming in at a very robust 59.7 compared to 59.4 in January. In the Eurozone Germany’s robust services sector moderated somewhat but the services sector in France continues to accelerate rapidly, with the PMI jumping from 59.7 compared to 57.8 in January. Elsewhere in the Eurozone Italy and Ireland expanded rapidly, while in Spain the PMI improved to an expansionary 50.8 compared to a contraction in January. The robust expansion in France and the improved conditions elsewhere in the Eurozone took the PMI for the Eurozone to 56.8 in February from 55.9 in January despite the moderation in Germany.
The significant rebound in the U.K. services sector in January was unable to follow through in February as the PMI moderated to 52.6 from 54.5 in January. Similarly, Japan’s services sector could not hold onto the gains of the previous two months, dropping back to 49.8 from 50.4 in January. The contraction in Australia’s services sector PMI has moderated significantly to 48.7 in February after sagging to 45.5 in January.
In the emerging economies the robust expansion in India’s services sector continues to accelerate. China’s non-manufacturing PMI tumbled to 44.1 from 56.4 and although lower than I expected (47) it was in line with the seasonal pattern.
Sources: CFLP; Plexus Asset Management.
The rate of expansion in Russia continues to moderate but the expansion in Brazil’s services sector has steadied.
|
Non-manufacturing/ Services PMI |
TREND |
||
| Country | Feb-11 | Jan-11 | |
| U.S. | 59.7 | 59.4 | Expansion accelerating, robust |
| Eurozone | 56.8 | 55.9 | Expansion accelerating, robust |
| Germany | 58.6 | 60.3 | Robust pace moderated |
| France | 59.7 | 57.8 | Expansion accelerating, robust |
| Italy | 53.1 | 49.9 | Expanding again |
| Spain | 50.8 | 49.3 | Expanding again |
| Ireland | 55.1 | 53.9 | Expansion accelerating |
| U.K. | 52.6 | 54.5 | Expansion moderated |
| Japan | 49.8 | 50.4 | Contracting again |
| Australia | 48.7 | 45.5 | Contraction moderating |
| Emerging Economies | |||
| Brazil | 52.7 | 52.7 | Expanding |
| China* | 44.1 | 56.4 | Seasonal contraction |
| India | 61.0 | 58.1 | Expansion accelerating, robust |
| Russia | 53.4 | 54.2 | Expansion moderated |
| JP Morgan Global Services | 59.3 | 58.2 | Expansion accelerated, robust |
Sources: Markit; CFLP*; ISM; Plexus Asset Management.
GDP-weighted/Composite PMIs
On a GDP-weighted/composite basis where the manufacturing and non-manufacturing/services are both taken into account, the growth in global economic activity continued to accelerate in February, taking the JP Morgan Global Composite PMI Index to a robust 59.4 from 58.3 in January and 57.1 in December.
| GDP-weighted/ Composite PMI | Trend | ||
| Country | Feb-11 | Jan-11 | |
| U.S.*** | 60.1 | 59.7 | Expansion accelerating, robust |
| Eurozone**** | 57.4 | 56.3 | Expansion accelerating, robust |
| Germany* | 60.9 | 61.3 | Robust |
| France* | 59.0 | 57.6 | Expansion accelerating, robust |
| U.K.**** | 55.1 | 56.6 | Expansion moderated, strong |
| Japan* | 51.0 | 50.9 | Expansion continues |
| Emerging Economies | |||
| China** | 47.3 | 55.0 | Seasonal contraction |
| India* | 61.0 | 59.6 | Expansion accelerated, robust |
| Russia* | 55.2 | 54.6 | Expansion accelerated |
| UAE* | 54.3 | 54.2 | Expansion accelerated somewhat |
| JP Morgan Global Composite* | 59.4 | 58.3 | Expansion accelerated, robust |
Sources: *Markit; **CFLP, Li & Fung, Plexus Asset Management; ***ISM, Plexus Asset Management; ****Markit, Plexus Asset Management.
Summary
U.S. economy: GDP growth accelerating
My GDP-weighted ISM PMI for the U.S. leads U.S. real GDP growth by a quarter. At this stage it indicates that the U.S. economy in the first quarter of this year is in excess of 3% on a year-ago basis and may even touch 3.5%. If the current robust manufacturing and non-manufacturing PMIs hold up through end June, the year-on-year GDP growth could reach 4% and beyond in the 2nd quarter!
Sources: ISM; FRED; Plexus Asset Management.
Eurozone: GDP growth to gain momentum in Q2
Although the official year-on-year GDP growth number for the 4th quarter came in at 2.0%, I am of the opinion the number will be revised upwards as my GDP-weighted PMI for the Eurozone indicates that the economy grew by approximately 2.5% on a year-ago basis. The PMIs during the fourth quarter of last year indicates that year-on-year growth in the GDP is likely to be maintained at 2.5% in the first quarter of this year but may accelerate to 3% in the second quarter.
Sources: Markit (various internet sources); I-Net; Plexus Asset Management.
China’s GDP-weighted PMI: tanked as expected in February but …
My calculated GDP-weighted PMI for China tanked in February as I expected based on the apparent seasonal trend influenced by the Chinese Golden Week that started on 2 February. A significant jump in both manufacturing and non-manufacturing PMIs is likely in March but the somewhat weaker trends compared to the past indicate that the stricter monetary policies pursued over the past 12 months have started to bite. I therefore doubt whether my GDP-weighted PMI will reach heights similar to those of 2008 and 2010.
Sources: CFLP; Plexus Asset Management.
From a forecasting point of view the CFLP manufacturing PMI gives a better picture of underlying GDP growth due to lower seasonality. China’s year-on-year GDP growth of 9.8% in the last quarter of last year was in line with my estimate of 10% based on the manufacturing PMI’s trend in the last quarter of last year. It is evident to me that China’s year-on-year GDP growth in the first quarter is likely to be slightly lower than the 4th quarter’s 9.8%.
Sources: Dismal Scientist; Li & Fung; Plexus Asset Management.
Japan: edging ahead!
The uptick in the manufacturing PMI and the second consecutive month of expansion in the services PMI may indicate that the Japanese economy may stave off a double-dip recession in the short term.
Sources: Dismal Scientist; Markit; Plexus Asset Management.
UK economy: Continuing to gaining traction…!
From my reading of the GDP-weighted PMI the U.K. has grown by approximately 1.8% in the first quarter on a year-on-year basis compared to 1.6% in the fourth quarter of last year. It is evident that growth in the second quarter will accelerate to approximately 2%.
Sources: Markit; Dismal Scientist; Plexus Asset Management.
Conclusion
Both global manufacturing and non-manufacturing/services PMI numbers continue to surprise me on the upside. I am therefore of the opinion that as things stand, a sustained improvement in global manufacturing and non-manufacturing/services PMIs in the next few months will again see some hawks raising their heads in the FOMC, BoE and ECB as headline inflation is also turning for the worse. I would certainly start to bet on the Fed raising the Fed funds rate in the third quarter of this year.
That said, my expectation hinges on a neutral scenario – that is the absence of black swans or, put differently, no major global crisis. However, the global pond is becoming increasingly infested by black swans, i.e. the worsening geo-political situation in the Middle East and North Africa, the stricter monetary policies of the PBoC, and the potential contagion of the debt crisis in the Eurozone. Any severe crisis is likely to adversely affect consumer sentiment and consequently demand in developed economies, and may therefore delay monetary tightening actions by the respective central banks.
Global non-manufacturing/services PMI Scorecard: robust growth all round! was first posted on March 5, 2011 at 7:00 pm.
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