An oldie but a goodie
CLASSIFICATION: PUBLIC
January 2014
Key Messages
•
2013 saw the developed economies get a bit of their mojo back. They continue to look in decent shape as 2014
gets underway.
•
The UK remains a standout performer with manufacturing, services and construction all firing. But a slight
tempering of the services PMI would not be surprising.
•
The emerging world remains broadly subdued but Central & Eastern Europe is posting healthy figures.
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The global economy continues to put the slowdown of the
past two years behind it and looks in decent shape as 2014 Chart 1: Leading Indicators – the ‘old’ economies show
gets underway. The global composite PMI, covering both the way
Source: Macrobond, RBS Group Economics
manufacturing and services, edged down marginally by 0.2 to 54
- exactly in line with the long-term average. The US services
104
G7
China
India
sector reading hit a six-month low, with manufacturing also
102
falling. And with the separate labour market report recording an
100
unexpectedly low level of job growth in December, it might just
98
temper some of the enthusiasm surrounding the US economy.
But while the US took a breather, the eurozone’s manufacturing
96
sector picked up the slack, giving more confidence that a
94
recovery, albeit fragile, is underway in the single currency area.
Taken together, the story in the developed world is one of
recovery. Chart 1 shows leading indicators for the ‘old’
developed economy club (the G7 which includes the US, UK, Germany, France, Italy, Japan and Canada) and China and
India. The line for the G7 is pointing firmly up while those for China and India – the emerging market stars – are
comparatively depressed. Indeed, it’s been seven years since the G7 was above both China and India. For now at least, the
‘old’ economies continue to lead the way.
Contacts:
Marcus Wright
Group Economics
0131 626 3953
marcus.wright@rbs.co.uk
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Does the dramatic turnaround in the fortunes of the UK
have further to run? A big contributer to the strong Chart 2: UK Services PMI running ahead of the services
performance of the ‘G7’ is the UK. The UK composite PMI may index – so a slight fall in the PMI may be due
have fallen for two straight months, but at 59.2 it remains very Source: Macrobond, RBS Group Economics
high. And at 60.4, the average reading of the past six months is
Index of Services Grow th - LHS
2
65
fully ten points higher than the equivalent period in 2012. The
1.5
Services PMI - RHS
60
UK is by some distance the economy that has seen the biggest
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55
0.5
positive turnaround over the past 12 months when compared to
0
50
all the other economies covered in the PMIs. It can take comfort
-0.5
45
from the fact that new orders for manufacturers and service
-1
40
-1.5
providers are both not just above 50, but above 60. The
-2
35
confident demand outlook of both manufacturers and service
providers is underlined by employment component readings well
above their long-term averages. We maintain that a softening of
UK PMI figures can be expected given that it has moved quite
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Group Economics
World Economy Barometer
www.rbs.com
World Economy Barometer - January 2014
far above growth in the services output index (chart 2). Manufacturing is a similar story with the hard data showing
unchanged output between October and November. But output is still growing in comparison to the previous year and at the
least the UK has set itself up for a good first quarter.
UK construction sector lending a hand. As well as healthy manufacturing and services readings, the construction PMI has
also performed well. Chart 3 below shows the construction PMI broken down to its three contributing components.
Residential activity has seen a sharp move upward in the last six months of 2013 as government schemes such as Help to
Buy breathes life into housing construction. Correspondingly, the number of housing construction starts and an index of the
volume of new residential housing are both on the up (chart 4). But commercial activity and civil engineering are also
enjoying better fortunes (chart 3), suggesting there’s more than just a housing recovery going on.
Chart 4: UK Housing Sector – More Building
Chart 3: UK Construction PMI – All sub-sectors
improving, not just housing
Source: Macrobond, RBS Group Economics
Source: Macrobond, RBS Group Economics
50,000
65
60
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50
45
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30
Residential Units - No . of Co nstructio n Starts - RHS
40,000
30,000
20,000
C iv il E ngine e ring
C o m m e rcia l A c t iv it y
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H
Residential Units - No. of Construction Starts - RHS
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10,000
H o us ing A c t iv it y
Emerging Markets – there’s still a good story to be told.
Chart 5: The industrial sector of emerging Europe goes
When strong performing emerging markets are mentioned,
from strength to strength
emerging Asia, and in particular China, spring to mind. But
Source: Macrobond, RBS Group Economics
the PMIs reveal that the better performing emerging markets
Avg of Tur,Pol,Cze & Hun
are to be found in Central & Eastern Europe (CEE) with
150
Avg of Ita,Spn,Por
140
Poland, Hungary, the Czech Republic and Turkey posting
Germ any
130
healthy manufacturing PMI figures. The industrial sectors of
120
these countries have rebounded strongly in 2013 and their
110
100
performance generally stands in stark contrast to peripheral
90
Europe (chart 5).
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Looking at Poland and the Czech Republic, they have
benefitted from structural reforms undertaken as they sought
to join firstly the EU and more recently their attempts to join
the eurozone. Foreign direct investment has flowed in on the back of relatively low wages and high skills. Meanwhile the
industrial sectors in these countries are increasingly tied to the fortunes of Germany’s so they have benefitted considerably in
recent years.
It’s not all plain-sailing. Turkey is in the midst of a political crisis and its reliance on capital inflows mean it is very exposed to
the US Fed tapering its quantitative easing programme (which means a bit less money for emerging markets to play with).
Hungary’s current government has created a little bit of uncertainty for investors, having shown itself to be ready to intervene
in the economy. However, overall the stronger industrial recovery being shown in CEE will be welcomed by many eurozone
members and countries such as the UK as they seek to strengthen their own recoveries. But some peripheral eurozone
members may see another competitive barrier in their quest for an export-led recovery.
World Economy Barometer - January 2014
Chart 6: Manuf. PMI – Deviation from long-term trend
Chart 7: Services PMI – Deviation from long-term trend
Source: Datastream, Group Economics
Source: Datastream, Group Economics
UK
Ireland
US
Japan
Japan
Turkey
UK
Vietnam
Spain
World
Ireland
Germ any
Germany
Brazil
Italy
Taiwan
US
Eurozone
World
Indonesia
Eurozone
Greece
Brazil
Russia
S. Korea
Australia
China
Mexico
Italy
Singpre
China
Spain
Russia
France
France
India
India
-6
-4
-2
0
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4
6
8
-15
-10
-5
0
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January 2014
Chart 8: PMI Heatmap – Manufacturing Sector
Oct-12 Nov-12
Global and Developed West
Global
UK
US
Eurozone
Germany
France
Peripheral Europe
Spain
Italy
Greece
Ireland
Asia
China
India
South
Korea
Taiwan
Japan
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Other Ems
Brazil
Russia
Key
•
1
2
3
4
Inside expansionary territory and rising
Inside expansionary territory but falling
Inside contractionary territory but rising
Inside contractionary territory and falling
- blank cells denote no change from the previous month
What are the Purchasing Managers’ Indices (PMIs) and why are they important? The PMIs are a key guage of global private sector activity. Business across the world’s major developed and developing
economies are surveyed each month and asked to describe activity levels in the context of a number of key variables, including business output, new orders, employment and prices. Both manufacturers and
service providers are surveyed (although construction and retail PMIs are provided for some countries). Most countries then produce a composite figure that gives a weighted average reading of all the sectors
surveyed. The readings are centred around 50, with a figure above 50 denoting expansion while a reading below 50 signifies contraction. By analysing PMI data we are able to take the temperature of the global
economy, assess how different regions and countries are performing and gain advance indication of future activity. Our analysis is issued each month following the release of all the surveys.
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Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts,
valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other
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