A PMI-tastrophe

Commentary: 7 October 2019

A Bloomberg analysis has shown that the Brazilian real will be the largest emerging-market benefactor in the event of the conclusion of a US-China trade deal, while the Thai baht and the Israeli shekel are among those which will be the least responsive. In general, commodity-exporter currencies such as the real and the rand as well as those countries with close trading relations with China, have been the most sensitive to news about the trade war, while those which have been the least responsive have mostly been commodity importers.  

Yet another indication of a global economy which is losing momentum. Japan’s factory production slipped in August as a recent sales tax hike threatens to crimp domestic demand. Production fell 1.2% from a month earlier, with declines in output of steel and motor vehicle being the largest contributors to the drop. Output is now 3.4% below May’s level. Slowing demand abroad has also weighed on Japanese exports and made the economy more dependent on consumer spending, which is likely to take a hit from the sales tax hike.  

The Institute of Supply Management (ISM) Manufacturing index, which measures US manufacturing activity, fell to a decade low in September, pushing the world’s largest economy deeper into danger of a recession. President Trump quickly took to Twitter to blast the US Federal Reserve for keeping interest rates too high (reminiscent of Ace Magashule’s rant at our Reserve Bank of a few months’ back), while conveniently forgetting that the ongoing trade war is the single largest culprit. Another worrying sign: only three of the 18 manufacturing industries surveyed by ISM reported growth. While manufacturing is a smaller part of the larger American economy than it once was, there are signs that the industry’s battles are now spreading to the larger services sector. The ISM’s non-manufacturing index – which tracks industries such as finance and restaurants – slipped to its lowest reading since August 2016.

Europe’s manufacturing slump deepened further in September, with the region’s PMI falling to a seven-year low and Germany recording its lowest reading – 41.7 – since June 2009. The country’s five leading research institutes have all slashed their forecasts for economic growth this year. Spain, Italy and France all saw readings which missed expectations, with only France, recording any growth in activity.

Boris Johnson says he is staying put. He has vowed that he will not quit as Britain’s prime minister even if he fails to secure a deal to leave the EU on the 31st October. But despite Johnson’s brave words, uncertainty around Britain’s biggest trade and foreign policy shift for more than 40 years, refuses to die down. There are hurdles to clear, most notably the “surrender act” – a law passed by Parliament forcing the prime minister to request a Brexit delay if a deal has not been secured by the 17th-18th October EU summit. Time is running out on efforts to avoid a potentially chaotic departure.  

Yet more talk and no action from the ANC National Executive Committee. The Committee has decided to take Mboweni’s economic proposals to an alliance summit for discussion. It is well known what both the SA Communist Party and Cosatu think of the document, so it is highly likely that the plan will wither and die, as do so many of the ANC’s grand schemes. Nonetheless, the ruling party has promised a stimulus plan of sorts – difficult to envision considering our fiscal constraints. Deteriorating revenue numbers point to a substantial worsening of the budget deficit and debt levels. (The Institute of International Finance has warned that the debt-to-GDP ratio could rise to as high as 95% by 2024, should Eskom not be restructured and a suitable growth plan be implemented). No surprise then that SA’s PMI fell sharply in September too – to 41.6 – the lowest level since August 2009. There were sharp drops in new orders and business activity and at a time when SA’s key trading partners are struggling, it is unlikely that we will see a sustained improvement in the sector anytime soon.  

By Bridget Kelly, Santam

Disclaimer: This research has been written by the economist at Santam Structured Insurance Limited (“the Insurer”). Whilst all care has been taken by the Insurer in the preparation of the opinions and forecasts and provision of the information contained in this report, the Insurer does not make any representations or give any warranties as to its correctness, accuracy or completeness, nor does the Insurer assume liability for any losses arising from errors or omissions in the opinions, forecasts or information irrespective of whether there has been any negligence by the Insurer, its affiliates or any officers or employees of the Insurer, and whether such losses be direct or consequential. Nothing contained in this document is to be construed as guidance, a proposal or a recommendation or advice to enter into, or refrain from entering into any transaction, or an offer to buy or sell any financial instrument. This communication is not intended nor should it be taken to create any legal relations or contractual relationships. Santam Structured Insurance Limited is an Authorised Financial Services Provider under South African law (FSP 1027).