Travelling day. Actually, they will all be travelling days for a few weeks. Will post when possible.
Euro area private sector close to stagnation in September
The IHS Markit Eurozone PMI® Composite Output Index fell in September to a level only slightly above the crucial 50.0 no-change mark. After accounting for seasonal factors, the index recorded 50.1, down from 51.9 (and lower than the earlier flash reading of 50.4). September’s figure was the lowest since June 2013 and signalled a broad stagnation of the private sector economy at the end of the third quarter of 2019.
Weakness remained centred on the manufacturing economy. Latest data showed that the goods producing sector experienced its sharpest fall in output for nearly seven years. In contrast, services experienced a further uplift in activity. However, the rate of growth was modest and the weakest since the start of the year.
National data showed Germany slipping into contraction territory during September for the first time since April 2013, and the only country to record a fall in activity compared to August. Growth was nonetheless relatively weak elsewhere. Italy and France registered only marginal increases in economic output, whilst growth weakened in both Ireland and Spain.
Weighing on the euro area’s private sector during September was a deterioration in the level of incoming new work. Data showed new business falling for the first time since January and, albeit modestly, to the greatest degree since mid-2013.
Export trade remained a key source of new business weakness as highlighted by another monthly decline in overall new export orders. According to the PMI figures, exports have been falling throughout the past year and September’s deterioration was the sharpest since composite export data were first available just over five years ago.
Faced with deteriorating demand conditions, overall activity levels were subsequently sustained via a reduction in business outstanding. A seventh successive monthly decline in backlogs of unfinished business was signalled by September’s survey data, with the rate of contraction the sharpest recorded by the survey since November 2014.
Despite activity levels being little changed, and new business falling, employment growth was sustained in September. However, the rate of expansion was modest and the weakest recorded by the survey in three-and-a-half years. Except for Spain, job creation was weaker across the euro area with Germany recording the weakest net increase in
employment.Price pressures also continued to dissipate in September, with input costs rising at the slowest rate since August 2016. Output charges increased only marginally with the rate of inflation softening to a near three-year low.
Finally, ongoing concerns over the global manufacturing downturn and political uncertainty around Brexit continued to weigh on confidence. Latest data showed sentiment only slightly higher than August’s 75-month low.
September’s IHS Markit Eurozone PMI® Services Business Activity Index indicated a notable slowdown in service sector growth. Posting 51.6, down from 53.5 in the previous month, the index signalled the weakest increase in activity since the start of 2019.
New business volumes also rose at a slower rate during September, increasing only marginally as demand faltered, especially from foreign clients. Services exports declined in September for a thirteenth consecutive month and at a series-record rate.
Companies were subsequently able to keep on top of workloads, with backlogs of work falling for a second successive month. Firms continued to recruit additional staff, although the rate of growth softened to an eight-month low.
Meanwhile, operating expenses rose markedly in September, but at the weakest degree for 25 months. With competitive pressures and demand faltering, output prices charged for services were raised only modestly in September.
Finally, confidence about the year ahead was stronger than in August, but nonetheless remained historically weak and amongst the lowest in the past five years.
Chris Williamson, Chief Business Economist at IHS Markit:
The eurozone economy ground to a halt in September, the PMI surveys painting the darkest picture since the current period of expansion began in mid-2013. GDP looks set to rise by 0.1% at best in the third quarter, with signs of further momentum being lost as we head into the fourth quarter, meaning the risk of recession is now very real.
Inflows of new business are falling at the fastest rate for over six years and employment growth has hit the lowest since early 2016. Companies are increasingly looking to reduce overheads and tighten belts in the face of falling demand and an uncertain outlook.
The downturn also shows further signs of spreading from manufacturing to services. While the goods-producing sector is stuck in its deepest downturn since 2012, the service sector has also seen its growth rate slow sharply to one of the weakest for six years. (…)
For a Change, It’s the World That Is Pulling Down the U.S. Economy As weakness from Germany to China intensifies, the U.S. is less insulated than in the past
(…) From tariff-related tension to a German auto-emissions scandal and a Chinese credit squeeze, forces weighing on external economies have begun to wash back on the U.S.
Historically, the U.S. has been largely immune from foreign forces because exports were a relatively small part of the economy and its financial markets responded mostly to domestic influences such as U.S. interest rates, inflation and domestic economic developments.
That has changed. First, the rest of the world’s share of global gross domestic product has grown, primarily thanks to China. Second, trade has become a larger share of U.S. output, and foreign sales contribute a growing share of U.S. company profits. Thanks to fracking, oil and gas production has become a major component of U.S. investment, but it is highly sensitive to oil prices that, in turn, respond to global growth.
A third reason is that integrated capital markets mean U.S. interest rates depend more heavily on conditions abroad. If foreign central banks ease, that can drive the dollar higher and tighten conditions for American manufacturers. That effect is likely even stronger with rates at or close to zero. (…)
Indeed, an important but often forgotten factor in the global slowdown is that Chinese authorities early last year set out to rein in private borrowing to head off a financial bubble. Auto sales in China, which rose by half between 2012 and mid-2018, and have since shrunk by 12%.
Oliver Rakau of Oxford Economics says German production has been hammered by an emissions cheating scandal that hurt sales and delayed new models, delayed certification of several models under new pollution standards and weak exports to Britain because of Brexit uncertainty.
The good news is these factors are fixable. German auto makers will soon be launching new models, Mr. Rakau says. China has allowed borrowing to reaccelerate. Mr. Trump could roll back tariffs as easily as he imposed them. (…)
U.S. to Impose Tariffs on EU Goods After WTO’s Airbus Ruling The Trump administration will move swiftly to implement tariffs on $7.5 billion of imports from the European Union, following a decision from the World Trade Organization that authorized tariffs due to EU subsidies of Airbus.
(…) The new duties represent the most significant trade action against the EU since the Trump administration hit the bloc with steel and aluminum duties last year, and could further sour relations between allies that have long sought to resolve trade disputes without resorting to tariffs. (…)
The Office of the U.S. Trade Representative said it would impose the tariffs starting Oct. 18, with 10% levies on jetliners and 25% duties on other products including Irish and Scotch whiskies, cheeses and hand tools.
The U.S. was authorized to impose tariffs of up to 100% on $7.5 billion of goods by the WTO in what has been a 15-year battle over support programs for Airbus and U.S. aerospace rival Boeing Co.
The global trade regulator had already determined that both aircraft makers received illegal government subsidies, with the case against the Airbus subsidies moving through the WTO system first. (…)
The WTO is set to rule on Boeing’s subsidies early next year, at which point the EU will be authorized to strike back with tariffs of its own. (…)
Duties would raise costs for airlines on both sides of the Atlantic and hit a U.S. supply chain employing 275,000 people and generating billions of dollars in revenue annually, the European plane maker said.
“Airbus is therefore hopeful that the U.S. and the EU will agree to find a negotiated solution,” Chief Executive Guillaume Faury said in a statement. The aircraft maker, which risks losing sales if tariffs take hold, sources some 40% of its parts from the U.S. and has a plant in Mobile, Ala. (…)
Other tariff threats loom over the EU. President Trump is poised to decide by Nov. 13 whether to tax cars and auto parts from Europe, risking a rapid escalation of duties on trans-Atlantic automotive trade worth some $100 billion. Leaders of a new EU administration, slated to take office Nov. 1, have urged Mr. Trump to avoid a trade war.
Washington is able to move quickly because it had previously published a list of up to $21 billion of European goods that were candidates for tariffs. Brussels has a $20 billion list of U.S. exports to target.
“If somebody is imposing tariffs on our aviation companies, we will do exactly the same,” European Commission President Jean-Claude Juncker said Wednesday evening in Brussels at an event held by the American Chamber of Commerce to the European Union. (…)
Europe could consider imposing tariffs before pursuing a broader settlement and even before the WTO rules on its case against Boeing, according to EU diplomats. (…)
Airbus SE was spared the full impact of U.S. import tariffs as President Donald Trump took steps to exempt planes built at the company’s Alabama plant from the 10% duty. (…)
U.S.-China Factory Breakup Is Hard to Do For the first time in a long time, U.S. factories look like they are doing even worse than Chinese ones.
(…) Chinese exports may be beginning to benefit from a cheaper yuan, which is now down over 6% against the dollar since April. But it also seems likely that Chinese exporters have spent much of the past two months trying to front-run new U.S. tariffs announced in August and set to come into effect in December. A similar pattern played out in last year. After big U.S. tariffs were announced midsummer, Chinese exports held up surprisingly well initially, but the strength proved temporary. (…)
The big picture is that despite the damage to bilateral ties from the trade tensions, any decoupling of the U.S. and Chinese economies is likely to be a long and painful process. China’s export orders and the U.S. PMI still move pretty well together. The former has only moved above the U.S. PMI four times since 2009, including last month.
Unless there is a real truce between Presidents Trump and Xi this month—or Beijing is willing to risk an even bigger yuan depreciation—Chinese exports will probably be facing stiffer headwinds again by early 2020. Nobody is winning the trade war.
China’s manufacturing PMI has perked up above 50.0:
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