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Economy in Brief

PMIs Collapse Globally...Except China...Is That a Problem?
by Robert Brusca  May 4, 2020

The finalized April PMIs for Europe are even weaker than the already released flash versions that were themselves quite weak. The spread of weakness is unusually uniform with the weakest manufacturing PMIs reading at 27.4 (India) and the strongest at 49.4 (China). Apart from China, the high reading is at 42.2 (Taiwan). After those two readings, only two countries, Japan and South Korea, have readings in their respective 40th percentiles. Most readings this month are in the 30th percentile range (eleven of seventeen).

Global recession...
In March, only 11% of the reports showed improvement month-to-month. In April, there is no improvement in any of the countries month-to-month. The sequential readings show that all countries in the table deteriorate over 12-months compared to a year ago, and over six-months compared to 12-months and over three-months compared to six-months ago. The slippage is broad; it is complete. This is what slippage into a synchronous global recession looks like.

China... the exception
The percentile standings show that over observations back to January 2016, all are at their weakest reading on that timeline and for most over a much longer timeline as well. The only exception to this is China that has a 15.4 percentile queue standing this month and a high-low range standing in its 78.5 percentile.

China is recovering much faster than everyone else because it was the first to plunge. But China's evolution is much different than the other countries in the table in another respect because it fell sharply and suddenly from 51.0 in January to 40.3 in February then recovered abruptly to 50.1 in March and then has eroded only to 49.4 in April. After a one-month hit, it has recovered nearly fully. Other countries are showing more persistent declines and none seem to show the prospect of the kind of rebound China has had. In the EU, there is some doubt that GDP will make it back to end-2019 levels by the end of 2022. China seems to be having the kind of quick rebound no one else can even dream of; that too fans tensions.

China's sharp snapback is not just a matter of envy; it is a curiosity. China has increasingly come under attack for having been the birthplace of the virus and having held back information on it as well as for having dealt with the outbreak badly. Some are accusing it of hoarding medical supplies in the wake of the crisis because it knew how badly global conditions would get. Needless to say, this is beginning to take on a life of its own as far as international relations are concerned. There are many questions for China about what happened and China has not been forthcoming with answers. It continues to assert that it has told everything and even maintains that there is no proof that the virus started in China. China's defensiveness has become offensive. Things have started to get ugly.

Australia has been pushing for some time now for an investigation into how this whole thing started and spread. China has pushed back. In the U.S., President Trump alleges that the virus is sourced from a China laboratory; U.S. Secretary of State Mike Pompeo claim that there is a…"significant amount of evidence" that the new coronavirus emerged from a Chinese laboratory, but did not dispute U.S. intelligence agencies' conclusion that it was not man-made. Whatever that means we cannot be sure unit we hear more. Still, the U.K. claims that the Chinese have a lot of questions to answer. The game of pressure is on.

U.S. President Trump has threatened to impose tariffs on China as punishment for holding back information on the virus. In a new tactic, Mr. Trump is threatening to impose tariffs because China is not buying enough goods under the negotiated phase one trade agreement. There is a lot of conflict here and not surprisingly markets are getting caught in the middle. U.S. stocks are opening the day with the major indexes down from one-half of one-percent to a little less than down by one percent.

There is considerable uncertainty about how the virus will perform; epidemiologists in the U.S. are concerned already about a second wave of infections later in the year. And now there is the prospect of renewed U.S.-China trade conflict. None of that bodes well for growth or for financial market performance.

The future has not been about economics for some time. Right now it is about the virus and concern about its development as well as about the possibility of a new trade war that could spread. It is an election year in the U.S. and lockdown has slowed campaigning. It has even led to a cancelled primary in New York. One possibility is that the new aggression by the U.S. is simply the President looking for an issue to give himself traction with voters. Trade enforcement could also be a new pet-project of the President. The President is also reported to be very interested in using these events to move the supply chains of U.S. companies out of China. These are truly strange days.

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