Note: I am travelling for the next several weeks, impacting frequency and depth.
FLASH PMIs:
USA:
This is how S&P Global summarizes its U.S. Flash PMI survey:
July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation.
The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That’s down from a 2% pace signalled by the survey in the second quarter.
However, growth is being entirely driven by the service sector, and in particular rising spend from international clients, which is helping offset a becalmed manufacturing sector and increasingly subdued demand from US households and businesses.
Furthermore, business optimism about the year-ahead outlook has deteriorated sharply to the lowest seen so far this year. The darkening picture adds downside risks to output growth in the coming months which, alongside the slowing in the pace of expansion in July, will keep alive fear that the US economy may yet succumb to another downturn before the year is out.
The stickiness of price pressures meanwhile remains a major concern. As the survey index of selling prices has acted as a reliable leading indicator of consumer price inflation, anticipating the easing to 3% in June, it sends a worrying signal that further falls in the rate of inflation below 3% may prove elusive in the near term.
The report often mentions subdued demand and new orders overall, including in domestic services, continued pressures on wages in spite of greater labor availability, and sticky inflation.
The rate of output charge inflation meanwhile picked up in July. Firms sought to pass through higher costs and increased interest rate payments to customers, with the overall rise driven by service providers. The pace of increase at services firms was steeper than the long-run series average. Goods producers noted little change in selling prices, with the rate of inflation the joint-slowest in the current 38-month sequence of increase.
EUROZONE: Flash PMI signals steeper downturn and cooling price pressures at start of third quarter
On inflation:
Inflationary pressures meanwhile moderated in July, with gathering deflation in manufacturing compounded by slower service sector inflation. Measured across both sectors, the rate of input cost inflation fell again in July, down for a tenth straight month to its lowest since November 2020 and dropping further below the survey’s long-run average. Average prices charged for goods and services meanwhile rose at the slowest rate for 29 months.
In manufacturing, falling demand for inputs, combined with improved supply, led to further discounting in supply chains. Over the 25-year survey history, only the six-month period to May 2009 has seen a steeper rate of decline in average factory input prices than witnessed in July. Lower costs fed through to lower manufacturing selling prices, which dropped for a third successive month and at the sharpest pace since September 2009.
While service sector input costs continued to rise at a rate well above the survey’s long-run average, buoyed in particular by upward wage pressures, the rate of increase slowed for a fifth consecutive month, edging down to the lowest since May 2021. Average prices charged for services also rose at a reduced pace, the rate of inflation at its lowest since October 2021.
The European Central Bank’s own bank lending survey does not provide an optimistic view of economic activity in the months ahead. With both credit standards tightening and demand for loans weakening, investment activity is set to weaken further. For the ECB, this will help to soften inflation pressures later on. The percentage of banks that are tightening credit standards is lower than in the first quarter, but overall the net percentage is still substantial at 14% compared to 27% between January and March. Risk perceptions are the main contributor to tightening standards at the moment.
Demand for borrowing is down further according to the survey and higher interest rates are an important contributor to the weakening demand for loans. This shows that the tightening effects from monetary policy are significant at the moment and will translate into weaker investment over the remainder of 2023. In this already weak economy in which growth has stagnated and recent indicators were weakening – the eurozone PMI for July indicated contraction – this has become a bigger point of debate for the ECB at the coming meetings to determine the end of the hike cycle.
Bank lending has weakened substantially since the start of ECB tightening, but it has been a gradual process so far. The bank lending survey continues to show significant tightening effects, but so far there has not been a cliff-edge effect on credit. While the ECB will take these results as a clear sign that the record hike cycle will have a substantial effect, we don’t expect it to influence Thursday’s rate decision too much. We expect the ECB to hike by 25bp in July.
JAPAN: Output continues to rise but new order growth slows sharply
China Sales Indexes Start Third Quarter Badly: Sharp falls in July in almost all China Indexes presage falling economic activity
The Sales Managers July Survey data reflects a further significant slowdown in economic growth. Covid related problems haven’t gone away completely: no less than 42 % of Chinese companies surveyed said they remained negatively impacted by Covid in one way or another, but the percentage is way down from the 55% recorded as recently as January.
The Manufacturing indexes continue to show bigger falls in activity than Services sector data.
Business Confidence is down sharply in the Manufacturing sector, and is now at its lowest point for almost 4 years.
The Manufacturing Sales Growth Index is at its lowest reading in over 3 years. And even the staffing Index, normally a lagging indicator, is at a 14 month low.
The Services sector did little better, with almost all indexes now below the 50 “no growth” level.
Consequently the all sector indexes did little to lift the rather gloomy picture spelt out by the seperate sector data.
Overall the Chinese economy, seemingly set earlier in the year on a rapid resumption of growth, now looks to have – at best – faltered in its ambitions.
Given the shrinking prospects for global growth in a world grown more suspicious of international trade, the absolute rate of growth achievable in the remainder of 2023 remains difficult to predict.
1 thought on “THE DAILY EDGE: 25 July 2023: Stagflation?”
The slowdown since Covid lockdowns in China’s economic boom over the past thirty years coupled with falling residential property prices may be undermining consumer confidence. In this boom, plentiful job opportunities helped allay concerns about China’s threadbare social safety net for low and moderate income workers. But with high unemployment among university graduates, fears of unemployment that could lead to destitution may become widespread. As happened in the USA before the New Deal’s social safety net, consumer spending may drop to depression levels.
At a low level of about 38% of the economy, consumer spending could easily be boosted by social welfare spending increases designed to improve both the social safety net and the distribution of income. But this would divert resources from President Xi’s preference for massive increases in military spending, AI and computer chip technologies and he seems to be rigid in his thinking going by the unnecessarily long Covid lockdowns.
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