World economy: both services & manufacturing picking up

We now have the services PMIs for the Big 8, so I've updated the chart.  As usual, each country's services and manufacturing PMIs were extreme-adjusted before they were combined (weighted by their proportion of world GDP) to give the Big 8 averages.  The green line shows the average of services and manufacturing, and will be the closest to actual GDP.   Note how, last year, services jumped as post-Covid "revenge spending" took off, while manufacturing didn't, but this year, both are picking up.  The Big 8 are:  the USA, the Euro Area/Zone (countries with the Euro currency), China, Japan, the UK, Russia, India and Brazil, which together make up roughly 70% of world GDP.

World growth continues to pick up, though I suspect its "slope", that is, the rate at which it will accelerate, will be moderate, as the effects of the US fiscal stimulus fade.

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The chart below shows the Big 8 manufacturing PMI, vs the year-on-year change in extreme-adjusted industrial production (my calculation).  Latest data for IP are estimates; we have IP to March and the PMIs to May.  It's comforting that the result of many different surveys produces roughly consistent results---it means that there are no special factors at play.  To put it another way:  the uptick in the world economy is real.  It's happening.

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The chart below shows the Big 8 PMI for manufacturing alone from 2000 to May 2024, as well the whole economy (manufacturing plus services) from 2012 to May 2024, compared with Big 8 GDP.  The only occasion in this whole period when the two PMIs moved in different directions was during the "revenge spending" episode in the first half of 2023.  World and Big 8 GDP (my calculations) are only available to Q4 2023, though we should have some idea of Q1 world/Big 8 GDP quite soon.  The PMIs give us some idea of what it will look like.

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World GDP growth about to turn up

February PMI indices have been released for all the economies for which I keep PMI data, so I have been able to calculate world PMI.

The chart below shows my calculation of the world PMI index compared with my calculation of the year-on-year percentage change in world real GDP.  For both time series, I have used PPP (purchasing power parity) GDP to estimate country weights.

World GDP growth has been higher than I expected, for two reasons.  The first is massive fiscal stimulus in the USA, the second is "revenge spending" on services after Covid lockdowns stopped holidays, eating out, social gatherings, etc.  As the impacts of both slowly tail off, the acceleration in world GDP might not be as pronounced as the turn up in world PMI suggests.

World GDP troughs too

As I mentioned yesterday, today I would show you what's been happening to world GDP.  These are my calculations, using national GDP data and weighting them by the percentage each country is in world GDP, using purchasing power parity (PPP).   It sounds a bit incestuous but believe me it works.  Both series in the chart show quarterly percentage change at annual rates.

Again, big regional/continental divergences in growth rates, with Europe negative in Q4, and the US strongly positive.  This divergence is because of fiscal policy, with the US expanding government spending with the "IRA" and Europe contracting spending because of budgetary crises.  Germany risks duplicating the UK's mistake of austerity after the GFC; and Germany is Europe's biggest economy.  Contracting government spending during a downturn doesn't balance the budget, it just drives the economy into deeper recession.

Because of structural weakness in China and foolish austerity in Europe, the economic recovery will be sluggish.

World industrial production is falling

 Some criticise me for following world industrial production.  "Most economies are mostly non-manufacturing these days", they say.  True, but the business cycle is normally driven by manufacturing and construction.  Covid was the exception, but the crash wasn't caused by monetary or fiscal policy, but by actual lockdowns.  "What matters is GDP, not sub-sectors of GDP", they say.  Also true, but GDP is quarterly and only published with a lag, whereas IP is available monthly.  And the business cycle components of IP and GDP are very similar, as the chart below shows.   The recent divergence between the two is because of the lagged demand for services because of lockdowns.  I don't know how much longer that'll continue.  As the manufacturing recession deepens, it seems probably that services will follow.  

World IP has started to fall, and it seems more than likely that GDP will also fall.

The chart below shows the 6-month rate of change in world IP, whereas the chart above shows the deviation from trend of world IP (and GDP).  It is now firmly negative.  However, the latest month is partially based on a new technique I'm using: estimating industrial production from manufacturing PMI surveys, though actual IP data for the US and China are used.  The estimates are for some of the other countries that make up world output data.  We'll see how effective that is over the next couple of months.