The S&P Global PMI surveys are a key input in the assessment of the cyclical environment. Judging by the manufacturing PMI, many countries have seen a weakening of momentum in the second quarter of 2024 versus the first quarter. However, for most countries, the level of the PMI in June is still higher than in December 2023. Moreover, 17 countries out of 31 still have a PMI of 50 or higher, which reflects ongoing growth in economic activity. Focusing on the Eurozone and using the composite PMI to take into account the important role of services, it is reassuring to see that in June, although dropping from the 52.2 level recorded in May, the composite PMI was still in ‘real GDP growth territory’ at 50.9. A drop below 50 might fuel a narrative of slow growth, at best, with an increased risk of negative quarterly numbers. However, the combination of ongoing disinflation, the ECB that has started a rate cutting cycle and structural investment needs -green and digital transition- leads us to think that the recent loss of momentum of survey data does not represent a change of direction for the Eurozone business cycle.
S&P GLOBAL MANUFACTURING PMIIn the assessment of the cyclical environment, business surveys play an important role. A key input are the S&P Global PMI surveys because of their broad coverage, their timeliness, and their close correlation with real GDP growth.
Chart 1 compares the momentum of the manufacturing PMI data for the second quarter of this year with that of the first quarter.[1] Most countries are above the diagonal line, which reflects a loss of momentum in the second quarter versus the first. Is this a source of concern? Before answering this, let’s remember that the PMI questionnaire asks whether, in the case of output, the survey participant has a higher, unchanged or lower level of production compared to the previous month.[2]
A loss of momentum thus implies a less dynamic growth environment, that is the balance of companies reporting a higher output has decreased. Nonetheless, before drawing any firm conclusions, one needs to check whether the recent momentum measure is positive (though less than before) or even negative and, secondly, where this leaves us in terms of latest reading of the PMI level.
S&P GLOBAL MAUFACTURING PMI: COUNTRY RANKIG
On the first point, starting from the upper left quadrant and moving clockwise, some countries with strong positive momentum in the first quarter recorded a partial reversal in the second quarter (Italy, Greece, United States). In the Eurozone, after a strong performance in the early part of the year, manufacturing business sentiment stagnated. Many countries, benefited from positive momentum in the first and second quarter. This also applies to the world manufacturing PMI. France did great in the first quarter but saw hardly any progress in the second one. The Netherlands, Spain and the UK delivered a particularly strong performance in both quarters. In Egypt and Japan, a slightly negative momentum in the first quarter was followed by a positive evolution in the second quarter. Finally, three countries recorded negative momentum in the first and second quarter: UAE, Mexico and Saudi Arabia.
EUROZONE: S&P GLOBAL COMPOSITE PMI AND REAL GDP GROWTH
On the second point, table 1 compares the manufacturing PMI in December 2023 with the index in June 2024. In December 2023, out of 31 observations –30 countries and the world index –, only 10 had a score of 50.0 or higher, with the world index at 49. In June 2024, 17 countries were at 50.0 or higher, with the world index at 50.9, and 70% of countries had a manufacturing PMI higher than in December 2023.
EUROZONE COMPOSITE PMI AND ECONOMIC GROWTHThe level of the PMI matters considering its correlation with real GDP growth. Chart 2 shows this for the Eurozone. The composite PMI is used because this gives a better representation of economic activity, given the importance of services.[3] Clearly, whether the composite PMI is above or below 50 matters a lot.
Below 50, real GDP growth is usually lower but also more often negative. Above 50, growth is higher and there are no negative quarters. Indeed, since the third quarter of 1998 – when the composite PMI for the Eurozone was first published – quarters with negative real GDP growth, correspond with a composite PMI below 50. In this respect, it is reassuring to see that in June the composite PMI, was still in ‘real GDP growth territory’ at 50.9.
However, after increasing from 49.2 in February to 50.3 in March and 51.7 in April, it peaked at 52.2 in May. A drop below 50 might fuel a narrative of slow growth, at best, with an increased risk of negative quarterly numbers. However, the combination of ongoing disinflation, the ECB that has started a rate cutting cycle and structural investment needs -green and digital transition- leads us to think that the recent loss of momentum of survey data does not represent a change of direction for the Eurozone business cycle.
