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Economy in Brief

Composite PMIs Are Under Pressure
by Robert Brusca  May 4, 2022

Global composite PMI readings from S&P Global in April show a mixed performance with eight of the 16 areas listed in the table worsening and eight of the 16 improving. However. March finds 5 improved while 11 worsened and in February 6 improved and 10 worsened.

The global economy continues to be racked with a number of factors that are adverse and with no offsetting tail winds in the forecast. The pandemic that’s been clobbering the global economy for the past two years continues to exist and to dog various economies in different ways, creating uneven conditions around the world.

As a separate matter, countries are still dealing with supply chains that were disrupted by the pandemic in the past and that has created a lasting legacy of problems as firms continue to shift and reorganize their global supply chains.

The Russian invasion of Ukraine intensifies many of these pressures by worsening supply chain issues and adding a host of new issues to the list of problems. There are sanctions on Russia which are going to impact the Russian economy as well as Western economies especially those that used to do the most business with Russia. There is a separate and special impact on oil as Russia is an oil and energy exporter. Europe has been dependent on Russian energy exports of gas and oil, and these are now under a dark cloud or are being sequentially suspended by Russia.

Europe is making plans to terminate its dependence on Russian energy supplies. In the meantime, the war rages on and Russian rhetoric continues to play games with established global standards for wartime conduct as it also is threatening that the war could widen and occasionally implies that more onerous weapons could be brought into play. Russia is so engaged and enraged it is violating nearly every standard of conduct on the books. China remains an observer verbally backing Russia and biding its time wary to not trigger Western sanctions but verbally, at least, standing behind Russia.

A clearly related but separate factor that deserves special mention is the impact on global agriculture. Grain exports from Ukraine have been impaired. There are reports of Russia stealing Ukrainian grain and commandeering Ukrainian agricultural equipment shipping it back to Russia or even to Chechnya. However, the biggest agricultural impact comes from the loss of fertilizer shipments to the rest of the world. Losing these shipments has raised the price of fertilizer greatly and has reduced its supply. Having less fertilizer means lower crop yields around the world in geographically very diverse places. The impact of this war will be felt by everyone in one way or another because of this. The impact on food prices is already clear; there will be an additional impact on crop yields which will hit food prices somewhere down the road.

All these factors have added up to more inflation pressures. And the global pressures began to mount in the wake of the actions taken to combat the global pandemic continue to have effect. In the United States, there was a substantial attempt to replace the purchasing power that workers lost by being shuttered at home when the Pandemic struck. The aim of this policy move was to maintain income even while supply was being disrupted which laid the groundwork for excessive demand to play out in subsequent months. As a separate matter, supply around the world was impacted adversely, further widening the supply-demand gap and pressuring prices. As inflation rose central banks have been slow to act and this has caused inflation pressures to rise and to build on themselves; a wage-price spiral has developed. So now the additional factor that economies must deal with is at central banks are raising rates or are planning to raise rates and this will create another headwind for global economies.

We have yet to see the full impact of these actions on various economies, but the composite PMIs give us some sense of what's happening. Over 12 months we see that all 16 entries in the table are doing better than there were twelve months ago. However, over six months we see that 15 are doing worse over six months than they were just six months ago. Over three months we see that 14 are doing worse than they were just three months ago.

There is a clear trend in the global economy; it is doing worse of later than it has been. The median rank standing among this group of countries right now is at 67.2%. That puts the composite PMI at roughly the two-thirds level of its historic queue of readings for the median. A few countries are doing exceptionally well. One that deserves mention is Hungary which sports a 91.4 percentile value. Hungary has been a country that has been close to Russia and has agreed to pay for its oil and rubles and therefore is being left out of the threats to have its oil supplies cut off. Hungary has the highest composite PMI standing in the table in April.

Clearly the Russia Ukraine war is the main uncertainty and the biggest danger facing the world economy right now. The risk of its spread or escalation cannot be dismissed and remains a palpable risk. At the same time, the clear trend-weakening of growth is clear the high inflation is a clear and pressing need for central banks to address. Central banks will raise rates in an environment of faltering growth. It would appear that a very difficult time lies ahead for the global economy. It appears that global bond and stock markets are only beginning to recognize the sorts of risks and conditions that lie ahead.

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