The small-15 PMI is falling precipitously

 It's been a long-term project of mine to look at how smaller economies respond to the cycles caused by the larger economies, what I call the big 8:  the USA, the Euro zone, China, Russia, Japan, India, Brazil and the UK.  

Since I don't have official PMI data going back much before 2012 for most of these small economies, and since I want to examine patterns over several business cycles, what I have done is to use business confidence time series to estimate what the PMIs would have been if they were available.  The correlation is usually close between business confidence and broader-based PMIs.  In some cases there are "PMI" series produced by other agencies, for example in South Africa and Australia, or there are PMI-like indicators, e.g, Sweden and Switzerland, produced by national chambers of commerce or industry.

I have not extreme-adjusted these series.  Where they are "spiky", I have smoothed them by fitting 7- or 5-month centred moving averages.

The results for the GDP-weighted average of the small-15, recently expanded to include Turkey, Mexico and Malaysia, look like this, when compared with the Big-8:

Notice how, until recently, the small-15 more or less followed the big-8, which is what you'd expect.   In fact, the small-15 had started a new upswing, parallelling the upturn that had started in the big-8, though from a lower point.   And then, starting in January, the small-15 turned down, quite steeply.

The last time the US raised tariffs sharply, during the Great Depression (the Smoot-Hawley tariffs), this worsened the global and the US recession, turning it into the Great Depression, as jumps in US tariffs were followed by increases elsewhere.  Note that it was a Republican president, House and Senate which passed the tariff legislation, leading to a massive swing to the Democrats which lasted 20 years.

The trade wars initiated by Trump are having the same effect.  The collapse is just beginning.   And every month that the tariffs and the tariff uncertainty remain worsens the situation.   Obviously, if tariffs quickly return to pre-Trump levels, the recession will likely be short.  But even then, damage has been done, and trade flows will be permanently altered.   Unfortunately, Trump shows no signs of changing course.  Even the supposed "reset" with China would still apply 30% tariffs to Chinese exports to the USA.  There is no one grown up in the Administration who will talk him down from the ledge.  No one in the Republican Party has the courage to stop him.  They fear his MAGA movement too much.  By the time Congress does act, it will be too late.

Big 8 PMI average ticks up a little

 As usual, the services and manufacturing PMIs are PPP-GDP-weighted averages of extreme-adjusted country PMIs.  The average of the two (the green line) then gives us the "Big 8" total PMI.  The Big 8 economies are the USA, the Euro Zone, the UK, India, China, Russia, Brazil, and Japan.   They make up roughly 70% of the world economy.

As you can see, the "revenge spending" on services after covid lockdowns ended is fizzling, while the manufacturing sector may be bottoming.   Of these economies, the Euro Zone and the UK remain by far the weakest, while the US seems to be rebounding, despite the swingeing rise in the Fed Funds rate, because of the fiscal sugar hit caused by the so-called Inflation Reduction Act.  The varying response of Europe and the US to the combination of fiscal stimulus and monetary stringency demonstrates the effectiveness of big deficit spending:  big stimulus in the US stops the downturn, no stimulus in Europe lets the European economy slide deep into recession. 

I'm sorry I didn't comment on this earlier in the month.  I've been dealing with some personal issues.

Euro zone as weak as during the euro crisis in 2012

The economies of "small 8" (Switzerland, Sweden, SA, NZ, Israel, Canada, Belgium, Australia, making up ~6% of the world economy) are driven by what happens to the Big 8.   Whatever politicians in smaller economies promise, it's hard to evade the consequences of the global business cycle.

Why these countries?  They were the countries I could construct 20 years plus of data for.  I wanted to see the relationship over several business cycles.  I have recently found data for Denmark and Norway back to the late 1990s, so I will be adding them to the small 8, making it the small 10.  More of that in a later post.

Small vs Big

 Is it possible for small economies to avoid the business cycles of large economies?  (They can have different long-term trend growth rates, that's clear enough)

I've talked about this before.   I have added two countries to the 'Small 6': Belgium and New Zealand, so that the 'Small 6' has become the 'Small 8'   The conclusions haven't changed.  When the 'Big 8' (EU, US, China, Japan, Russia, India, Brazil and the UK) slow down, the 'Small 8' (and by implication all small economies) do too.  The 'Small 8' economies are :Australia, Belgium, Canada, Israel, New Zealand, South Africa, Switzerland, and Sweden.  The choice has been driven by the countries for which I have a long enough data series.  

As before, where I do not have a PMI because it does not go back long enough, I have estimated a value from a similar time series.  For example, in Australia there is a PMI calculated by S&P Global, sponsored by Judo Bank , as well as a PMI calculated by the Australian Industry Group (AIG).  For the period before the Judo Bank PMI is available, I have used the 7-month centred moving average of the AIG series as Australia's representative PMI.

Moral of the story: electorates often blame the government of the day for an economic downturn.  For many if not most countries, however, the downturn is "imported" from the world's largest economies.  As the old saying goes, "when America sneezes, the rest of the world catches a cold".

Click on chart to see a clearer image.