Fra BNP Paribas:
Global manufacturing indicators continue to improve, with signs that this trend may continue.
Capacity utilization is increasing in many countries, with the eurozone approaching previous peak levels (Germany is a standout), which augurs well for investment. The US lags in this.
Pricing power is returning as demand strengthens, with output prices firming across a range of countries, reflecting higher input costs, but a better pricing climate too. The IMF has just revised up its global growth prospects – not a lot, but it is acknowledging what we have been saying for some time, that a quite broad-based recovery is in train. July OECD industrial production (IP) was up 3.3% – not
spectacular, but the best since 2010 and up from -0.5% in July 2016.
There are also welcome signs of some revival in capital spending. Ex-transportation, US durable goods orders are up 6.5% y/y, compared with a 1% drop in the same figures last year. Euro area capital goods orders were up 7.5% y/y in July. This signals increased faith in future demand as well as higher rates of capacity utilization. Euro area capacity utilization in manufacturing is at 83.5%, a figure last registered in 2008, and apparently still rising. Higher
investment should help raise productivity growth, which in turn should impinge on consumption.
Many manufacturing surveys show a buoyant picture, recording multiyear highs. The
US ISM at 60.8 in September is the highest it has been for 13 years. The eurozone PMI is also recording figures close to previous peaks. In China, The official CFLP PMI remains on an improving trend, and was up to 52.4 in September, 0.7 pp higher than the previous month and the highest since April 2012. New orders within PMI rose by 1.7 points to 54.8 in September.
Some of these figures have not yet translated fully into production figures in all countries, with US manufacturing output only about 1½% above year-ago levels, on average, from May to August, though some recovery from should help before year-end. Other countries are doing better, though, with China, Japan Italy and Canada recording year-on-year increases approaching 5% or more.
Germany is not far behind. Chinese IP data are somewhat at odds with official PMIs; IP growth slowed from 7.6% y/y in June to 6.4% y/y in July and 6%
y/y in August. This slowing is largely due to mining, which has kept contracting. Manufacturing output had retained a strong and stable growth rate of 7.2-7.4% y/y since March this year.
The UK, despite improved competitiveness, is the laggard. At a headline level, manufacturing confidence is significantly outperforming that of services and construction. However, the implied level of domestic orders is quite weak, reflecting a soft domestically oriented services sector. At current levels, the manufacturing PMI is consistent with around 2% y/y manufacturing output
growth, which is only worth about 0.2pp on annual GDP growth.
