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Economy in Brief

Asian PMIs Remain Weak in a Weak Global Economy
by Robert Brusca  May 2, 2019

Asia: still weak after all these years
The Asian PMIs show weakening monthly performance from four of nine reporters with one (Japan) improving albeit showing manufacturing contraction (PMI raw score below 50). Japan is the lone manufacturing PMI below 50 in April, compared to February when there were four of those, plus the ASEAN reading (below 50). So there has been some improvement across Asia. At least there are fewer Asian countries showing outright contraction. However, the unweighted average of quarterly average readings shows the PMI average still weakening from 12-months to six-months to three-months.

Only South Korea shows a steady deceleration and persistent contraction on this timeline and only Thailand shows the opposite, persistent expansion and acceleration. Japan shows persistent weakening in the PMIs, but Japan's PMIs do not show contraction on all timelines (six-month and 12-month averages show expansion).

There are five countries in which the three-month PMI averages weakened relative to the six-month averages and five more in which the six-month weakened relative to the 12-month PMI and five others in which the 12-month PMI weakened relative to the 12-month average of 12-months ago (not shown).

A wheel within a wheel
Clearly, Asia is still struggling. While we can identify a metric of improvement (fewer countries show manufacturing declines in April), the trends are still broadly weak and weakening. There is also the fact that the unweighted PMI average for the group did rise in April and the ASEAN reading improved in April. It is the broad sequential trends that are still moving lower. The monthly data are more upbeat but also less reliable. Moreover, the values of the PMI readings remain low, higher month-to-month or not. In April 2019, Myanmar has the highest raw PMI reading at 53.7 and Vietnam is the second highest at 52.5. Is that as good as it gets?

Few if any sources of strength
Myanmar has been very weak. Its April PMI reading (53.7) has a 92.7 percentile standing. Thailand with a weaker 51.0 PMI diffusion reading has the same 92.7 percentile standing. These are exceptionally high standings for such low PMI readings. For example, Vietnam with a PMI reading of 52.5 has a percentile standing of only 53.8.

Relative strength still only pairs with absolute weakness
Indeed the percentile standings across the Asian manufacturing PMIs are all weak or they are high standings paired with low diffusion readings (!). The Philippines, Japan, China, and India all have rankings below their respective 50 percentile standings which means that the readings are below their respective medians. Indonesia, South Korea and Vietnam have middle of the road standings but two of those countries have PMI diffusion values that still are not even as high as 51.

Green shoots…or gangrene?
Some have been seeing signs of 'Green shoots' in the global economy. Is there a nascent pick up in the works? Maybe…eventually… But for now the better reports mix with some severe backtracking so that it all seems to be so much sputtering.
• To be sure there is gathering optimism that the United States and China are finally going to have a trade deal and that tariffs will be lifted. But all that is still being negotiated.
• There may not be expectations for it, but there are certainly hopes that Brexit will find a nondestructive solution.
• While in the U.S. GDP has shown some upside surprises, it has done so on quirky inventory gains and import drops signaling that very well might spell just the opposite: weakness for the period ahead.
• In addition, U.S. vehicle sales came up lame in April and the U.S. Chicago area PMI and the national manufacturing ISM both showed extremely sharp drops in April. No green shoots there...gangrene?
• In Germany, there was an unexpected drop in retail sales which in March fell by 2.1% year-on year.
• Meanwhile, inflation in Germany is on the border of its 2% mark which is uncomfortable for Germans. Remember that the ECB has an EMU-wide target and there are NO country specific inflation targets in the EMU.

Oil prices began to weaken today as oil output has surged possibly a supply reaction to what have been rising global prices. Still, oil is a patchwork of issues with conflicts in Libya and Venezuela. The U.S. is trying hard to cut Iran off from supplying global markets. Iran's economy is looking at a 6% decline in GDP.

Central bankers are like deer caught in the headlights
On the whole central banks are in a holding pattern.
• Inflation is the U.S. ticked lower for the Fed's PCE core and the Fed remains skeptical of inflation staying low and yet claims to be curiously committed to hitting its 2% target and still trying to convince us that its target is symmetric. I don't know how a central bank can have inflation undershoot its target, remain skeptical of that (meaning that policy does not respond to boost it back up) and yet expect to hit a higher inflation objective except by pure dumb luck.
• Meanwhile, Mark Carney is warning investors that they may be too complacent and may not appreciate how fast rates may have to rise in the U.K. I suppose it is concern about a 'No Deal' Brexit that would drive the pound sterling lower and force monetary tightening by the Bank of England.
• For its part, the ECB still has more LTRO loans planned for September. In the meantime, there are European elections and there is no telling if destabilizing political forces will impact that election or be kept at bay.
• And the U.S. and the EU are in the early phases of positioning for their trade negotiations. The U.S. is also talking to Japan. Central banks are not party to these talks, but these talks may impact central banking policy tradeoffs.

Important patterns in flux
The bottom line is that there are a lot of things in flux. Some of them may be good, such as U.S. productivity may actually be recovering after a long period of being depressed. But it also seems clear that economists are on the pessimistic side of things and by that I mean to include those economists that hold sway on central bank policy. In the U.S., policy economists are still wary of the notion of a productivity revival and at the same time mostly in denial about the prospects for inflation to stay low (even though those two ideas go together hand-in-hand). And yet inflation expectations are some of the lowest we have seen in the U.S. and inflation compensation as extracted from the yield curve remains low as well. The yield curve remains flat but is not headed for inversion as it once was (and as it briefly did). U.S. policy has set the tone for the global economy so how these U.S. trends play out will be very important for global events like growth, inflation interest rates and market reactions.

Politics, geopolitics, regionalism, and leadership
Still, there is a lot going on in the world involving national policies, elections, regional elections, the oil market, geopolitical events, and economic trends that imbue this period with an unusual measure of uncertainty. And it comes at a time when political leadership globally seems to be the most challenged that it has been in the entire Post-War period. In the U.S., Donald Trump is under extreme pressure from Democrats who continue to seek a way to remove him from office as they have from day one. Macron in France deals with his Yellow-Vest protesters. Theresa May in the U.K. cannot finish her Brexit exit and is paying a political price for it. Angela Merkel has been replaced in Germany. Italian policies are upside down and hostile. Spanish politics and leadership is just being patched back together in the wake of elections that have reestablished a socialist foothold there. There are somewhat heighted exchanges between Taiwan and China. Meanwhile, China seems to be acting to undermine freedoms in Hong Kong. In Japan, Mr. Abe remains, but his past troubles are still there to haunt him. In terms of policy, there are few levers left that Japan has to pull. The first score of the new millennium is turning out to a more interesting period of years than we expected. What comes next is anyone's guess.

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