Global economy sluggish in Q2

While services outperformed manufacturing in all 12 major developed and emerging economies, India was the only exception and continued to lead the global growth rankings in June

The global economic expansion decelerated at the end of the second quarter as a renewed contraction in manufacturing output was accompanied by the slowest growth of service sector activity growing for four months. Diverging sector prices trends also persisted, keeping overall global price inflation elevated, albeit moving lower, per the monthly PMI report by S&P Global.

The worldwide Purchasing Managers’ Index (PMI) surveys compiled by S&P Global Market Intelligence indicated a sixteenth monthly fall in export orders for goods and services at the end of the second quarter. At a five-month low of 48.3, down from 48.8 in May, the seasonally adjusted PMI New Export Orders Index signalled a steepening downturn in global trade, as falling goods trade was accompanied by a softening expansion of services exports.

The JPMorgan Global PMI Composite Output Index – produced by S&P Global – posted 52.7 in June, down from 54.4 in May. This marked the first slowdown in the expansion of the global economy since growth commenced in February. The current reading is broadly consistent with solid annualized quarterly global GDP growth of 3%.

Services slip, but remains key driver

The service sector remained the primary driver of the global economic expansion in June. That said, the pace of global services growth slipped to a four-month low amid signs of weaker consumer demand growth. Slower new business inflows for service providers underpinned the latest change, though demand was sufficiently strong to drive prices charged for services higher at a historically elevated rate.

The state of weakening demand conditions is far more severe among goods producers, however, as new order inflows into factories declined globally for a twelfth consecutive month in June and at the sharpest rate since January. A dearth of demand, coupled with the exhaustion of backlogged orders into the mid-year, led to global goods producers paring back production for the first time since January.

This weak demand led to increasing numbers of producers offering discounts, driving factory gate prices lower for a second straight month. Amid this slowdown in services in supporting growth and renewed weakness in manufacturing production, it would be prudent to keep an even closer eye on the global growth trajectory.

Key Takeaways

In short, the key takeaways from the June PMI are:

1. A slowdown in global growth had been brought about by a renewed contraction in goods production and softer service sector expansion in June.
2. Inflation nevertheless remains elevated globally as elevated service sector cost inflation offset falling goods prices, albeit with signs of overall price pressures moderating.
3. Future expectations outline the likelihood for continued divergence in performance between manufacturing and services, hinting that further monetary policy action may unfold to tame inflation while simultaneously continue to cap output.

Factory output falls

Factory output, which had risen in the prior four months largely on the back of improving supply chains, fell back into decline in June amid a growing dearth of new orders. New orders have fallen continually over the past year. With pessimism about the outlook also intensifying, factories globally cut back on input buying and focused on inventory reduction, exacerbating the downturn in demand. The eurozone reported the steepest decline, though output notably also fell in the US, Canada, the UK, Brazil and Japan. Recent resurgent growth in mainland China also lost considerable momentum.

Global manufacturing output fell for the first time in six months in June, according to the latest PMI surveys compiled by S&P Global, hinting at the start of a new downturn in global goods production after a tepid output recovery in the first five months of the year. At 49.2, down from 51.4 in May, the output index from the JPMorgan Global Manufacturing PMI fell to its lowest since January.

India heads global expansion

The outperformance of services relative to manufacturing was common in all 12 major developed and emerging economies covered by the PMI except India, which continued to lead the global growth rankings in June. Russia reported the second-strongest expansion, in part due to increased import substitution amid ongoing sanctions.Russia was the only economy to report faster overall business growth in June.

The eurozone was the worst performer, suffering a marginal contraction of output after five months of expansion. Growth meanwhile slowed to three-month lows in the UK and US and slipped to a four-month low in Japan. In mainland China, this year’s post-COVID-19 economic bounce lost pace, with overall business activity across manufacturing and services growing at the slowest rate since January. A cool down in manufacturing output growth was accompanied by a marked slowing in service sector growth.

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