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Prospects Daily: Euro Area PMI signals slower pace of decline, US manufacturing index drops 2.2 points, PMIs across the developing countries signal expansion

Financial Markets…Spain has formally requested a €39.5bn bailout for its struggling banking sector pending the approval today at the meeting of Euro-zone finance ministers in Brussels. If approved, aid is to be disbursed by December 12th. Global stock markets were mixed on the positive news on China’s rebound, Spanish bail-out, weak US manufacturing report, and ongoing jitters over the looming "fiscal cliff". Most Asian shares rose on Monday as further signs of a stabilizing Chinese economy boosted investor risk appetite but Mainland Chinese shares closed lower with profit taking in some sectors. European shares were higher after the Spain bail-out news.  The euro rose against the dollar. US markets opened high but lost the gains after weaker-than-expected US ISM manufacturing report.

Credit ratings agency Moody's cut its rating for the euro zone rescue funds ESM and EFSF to Aa1 from Aaa on Friday following its downgrade of France—one of its largest financial supporters—earlier in November. The agency said it kept a negative outlook for the new credit rating. The EFSF and ESM said in a statement that they took note of Moody's decision but did not agree with it because the rating agency's approach which does not sufficiently acknowledge ESM's exceptionally strong institutional framework, political commitment and capital structure.

High-income Economies…Markit’s manufacturing Purchasing Managers’ Index (PMI) for the Euro Area suggests that manufacturing activity continued to contract but at a slower pace, with the index rising to 46.2 in November from 45.4 in October. The Eurozone index has remained below the 50-mark signaling contraction for the sixteenth straight month.

The improved prospects for Eurozone manufacturing were driven by PMI increases in Germany (to 46.8 in November from 46.0 in October), France (to 44.5 in November, a three month high, from 43.7), Spain (45.3 vs. 43.5), and Greece (41.8 vs. 41.0). Italy’s manufacturing PMI, however, edged down to 45.1 in November from 45.5 in October, signaling a faster pace of deterioration.  

Manufacturing PMI for the UK indicated some stabilization of the sector, with the index rising to 49.1 in November, its highest level since August and closer to the 50-mark separating expansion from contraction, from 47.3 in October.  

In contrast, ISM manufacturing index for the US dropped sharply by 2.2 points to 49.5 in November, falling into contractionary territory and well below expectations, from a five-month high of 51.7 in October. The decline reflects disruptions caused by Hurricane Sandy, uncertainty caused by an impasse in US fiscal cliff discussions, and weak overseas demand. The sub-index of US new orders dropped to 50.3 from 54.2, while the sub-index of export orders dropped to 47 from 48.

Developing Economies…PMIs across the major developing countries in November signals expansion: China’s HSBC Manufacturing PMI’s final reading of 50.5 in November confirmed the earlier indications that the sector is expanding for first time in 13 months. An official PMI for non-manufacturing sectors rose to 55.6 in November from 55.5 in October, providing additional supportive news on China’s economic rebound.

India’s HSBC Manufacturing PMI increased to 53.7 in November from 52.9 in October signaling an accelerated expansion of manufacturing sector.

Indonesia’s
HSBC Manufacturing PMI at 51.5 in November signals a continued expansion. Meanwhile, Indonesia posted a record trade deficit of US$1.54bn in October on weak external demand for Indonesia’s commodities (coal, tin and palm oil) exports and strong growth of fuel imports supported by price subsidies.

Vietnam’s
HSBC Manufacturing PMI rose to 50.5 from 48.7 suggesting the growth of Vietnam's manufacturing sector for the first time in fourteen months as both production levels and new orders increased.

Russia’s HSBC Manufacturing Purchasing Manager’s Index at 52.3 in November signals the fourteenth consecutive month of expansion.

In contrast, South Africa’s manufacturing PMI remained below a key level for a third month in November but increased to 49.5 from 47.1 in October.