'China's domestic growth fizzle' largely explains why global trade is softening

Zhai Yujia/China News Service/VCG via Getty Images
  • Activity levels across the global manufacturing sector improved at the slowest pace since September 2016 last month.
  • New export orders — a measure of external demand — declined for a fourth consecutive month.
  • HSBC says the deterioration in demand not only reflects the trade war between China and the US but also weaker economic conditions in both nations.

The latest batch of manufacturing Purchasing Managers Indexes for December were released last week, painting a gloomy picture on global industrial activity in late 2018.

According to the IHS Markit, global activity levels improved at the slowest pace in 27 months, leaving the average over the December quarter at the lowest level in over two years.

Of note, new export orders — an indicator on external demand — fell for a fourth consecutive month, and at a slightly faster pace than November.

While the obvious catalyst to explain the deterioration in external demand is the trade war between the United States and China, Frederic Neumann, Co-head of Asian Economics Research at HSBC, says that’s not the only factor behind the recent slump.

“It’s easy to blame it all on the tariff tiff between the US and China but there’s a deeper trade malaise that reflects a synchronized
slowdown,” he says.

“Globally, new export orders have contracted now for four months running, a stretch last seen in mid-2016. And the fall is geographically spread out as well, stretching from Europe to Japan, and emerging markets in between.”

The heat map below showing the movement in new exports orders from national PMI reports produced by IHS Markit makes for sobering viewing with broad-based weakness seen in most nations, be they developed or developing.

HSBC

For those not familiar with how PMIs work, a reading of 50 indicates that orders were unchanged from a month earlier. The distance from this level — be it higher or lower — measures how quickly the increase or decrease occurred during the month.

There were a lot of sub-50 readings seen in December, something Neumann says likely reflects a loss of economic momentum in both China and the United States.

“China’s domestic growth fizzle has much to do with this, with both its PMIs dipping below the waterline last month. But demand looks wobbly elsewhere, too, including in the US where manufacturing activity seems to be slowing,” he says.

While policymakers in both nations have taken steps to help appease growing concerns about the outlook for economic activity in recent days, whether that will translate to an improvement in the global manufacturing PMI, particularly in the near-term, remains debatable.

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