Recent Updates

  • South Africa: BER Consumer Confidence (Q4)
  • Czech Republic: Employment Information (Nov)
  • Hungary: Foreign Trade (Oct-Prelim), CPI Press, CPI by COICOP (Nov)
  • Romania: Central Govt Debt, Holdings of Govt Securities (Sep)
  • more updates...

Economy in Brief

China's PMIs Spurt...Is It Over Already? Hardly
by Robert Brusca  March 31, 2020

China has logged an exceptional snapback in its manufacturing and nonmanufacturing PMIs in March. In February, China shocked the world by posting a manufacturing PMI that fell to 35.7 from 50.0 and a nonmanufacturing PMI that fell to 29.6 from 54.1. These were shocking and dramatic drops that occurred as China was practicing isolation and lockdown to combat the coronavirus spread. But suddenly one month later with Wuhan only beginning to come out of lockdown and conditions still not really normalized, China's PMI gauge has shot up to 52.0 for manufacturing and 52.3 for nonmanufacturing. The manufacturing gauge is up above its January reading. Nonmanufacturing and manufacturing readings both are stronger than their respective 12-month averages.

Snapback is still insufficient
Still, manufacturing is outperforming services; it was last stronger than its March reading in September 2017. Nonmanufacturing reading, however, is weaker in March that every single month prior to February 2020 on record. The March nonmanufacturing PMI is stronger than the average over 12 months, six months and three months only because those averages include the exceptional weakness in February 2020. As for manufacturing, we will see how the PMI fares next month now that it is at a reading of 52.0.

Manufacturing should recover faster
The fuller and more rapid rebound in manufacturing compared to nonmanufacturing is not surprising considering the nature of the beasts. Manufacturing is a very structured activity and firms can more easily ramp up output on their own say-so. Goods production also features inventory management. I'd expect firms to be facing strong demands for goods and depleted inventories at their customers. But the nonmanufacturing sector that is dominated by services is for the most part a hand-to-mouth demand fulfillment sector. In the wake of such a crisis, while we can expect that people to want to get out of lockdown and to resume their normal lives, we can also expect some reticence to go back to old habits. And of course, there is no inventorying meals away from home. Coming out of a lockdown an action meant to reduce social interactions especially in an environment in which the virus has not been eliminated, we would expect a cautious rebound. This month's rebound is much more vigorous than cautious even though it lags behind manufacturing.

Is China a template?
China's sharp rebound has caught a lot of attention. Can recovery really be so full and so fast? And can other nations follow China's example?

PMIs: what they are and are not
These questions meld several elements into a discussion of their answer. One factor is that the PMI is a statistic of breadth not of strength. It looks at month-to-month changes in breadth. So breadth has jumped sharply in March relative to extremely depressed levels in February. Any improvement in output month-to-month generates a positive diffusion response. I suspect that despite the impressive recovery registered by diffusion, output in China is still relatively weak by recent standards. But diffusion will not tell us that. It is true that we often infer strength from breadth, but that does not work here.

Evaluating 'other data'
We could also see some strong rebounds in other conventional (count 'em up) gauges like industrial output and retail sales as both output and sales will rise from a very depressed base. In that case, the year-on-year change will provide somewhat better guidance than the month-to-month changes.

Total political and economic control vs. democracies
As for the suddenness of the rebound, well here we have to appeal to the fact that China is a communist state and that the authorities exercised broad and draconian power including using the most invasive surveillance system on the planet to enforce its lockdown.

China's control: an example
The story of the effectiveness of China's surveillance system that got my attention concerned a car that China's traffic camera's observed leaving and infected area, driving to a less infected area. By the time that driver got home, Chinese police were waiting. They informed him of his 14-day quarantine and said that his boss had already been contacted on the matter. After 12 days, this same persons got cabin fever and went out to the park at which time surveillance cameras ID'd him; the police met him in the park ordering him back to isolation for the remaining two days. No Western country will have that sort of containment and compliance capability. And no western country acted that fast or comprehensively to crack down on the virus. In fact, western nations and others generally had the virus insinuated into their countries in a diffused fashion instead of in one spot. Some were the victims of super-spreaders whereas in Wuhan the center of the crisis was local and remained local for a long while until a long gestation period laid the groundwork for spreading and then panic set in and an exodus occurred.

Situations outside China are not like China
The U.S. has infections across the country as do other western nations. There is no single center of the epidemic in any of these places, but each seems to have its own 'hot-spot.' We can expect that putting the virus behind will be a truly drawn out process and it will not be accomplished without the ability to test widely. So while testing capabilities are still ramping up globally, the time is still not right to think that stopping the spread is right around the corner.

Still need a better plan
However, as I have mentioned many, many times by now, there is an ability to better shelter the aged and the other at-risk population so that the virus will not spread to the most vulnerable and that will also help to reduce the load on hospitals. In France in particular, a number of rest homes seem to have been infected with devastating consequences. There is no doubt that the virus is a killer and must be stopped, however, it is equally clear that it is a much bigger risk to some portions of the population compared to others. Health policy should use the known facts about demographic vulnerabilities to help form a policy to deal with it.

Sheltering in place is discriminatory
The incoming commentary from Wuhan shows just how unevenly this virus has hit people. Wealthy Chinese who could afford to stay inside have praised the government for the policy. Poor people and small business owners complain of how they have been ruined. The World Bank projects a sharp rising in poverty because of the virus.

Life after Virus
Italy is using the virus and the ramp up in its spending and debt as an excuse to seek debt forgiveness like that offered to others in the wake of WWII. Italy has a point, though it is not clear that it will make any progress on this front. I think the real question will be after this is dealt with how China will be treated. Its poor public health response and unwillingness, initially, to sacrifice growth allowed this thing that might have been contained to Wuhan to spread to 177 countries globally. China has been a reluctant international citizen in many respects. It pursues policies against human rights within its borders claiming sovereignty. It pollutes a great deal but pollution knows no boundaries. It is obstreperous about international agreements and law including its grab of the South China Sea that the World Court did not recognize and called illegal. China ignored that ruling. It could not be clearer that with so many international linkages 'sovereignty' may not have the same meaning in the future as it does today. It will be interesting to see what the global community will want to do to deal with China and the amazing damage caused by its negligence when this crisis passes. Have we learned anything or will we just fiddle dee-dee it away?

large image