June surveys in the manufacturing sector have brought a more heterogeneous dynamic than in the previous months. Asia is becoming weaker; Europe stronger and the USA try to find their way.
This heterogeneity is not bad news as this will create distinct expectation trends all over the world. This will contrast with the uniformity we’ve seen until recently.

The world index for the manufacturing sector was at the same level in June than in May at 50.6. There is an improvement in new orders which is compensated by deterioration in employment. But there is no strong tendency.

On chart 1 we see that all indices remain close to 50 which is the threshold between improvement and deterioration. Nevertheless it is worth to notice the rapid improvement in the United Kingdom and in Japan. In the former the higher index reflects a stronger new export order index. As in Spain and Italy (see here), the UK takes advantage of a stronger external dynamics. It’s an impulse that could have positive impact on the sector’s dynamics. The Japanese case is interesting as the improvement does not come from outside. It’s not a higher new export orders index as it was seen in previous months after yen devaluation. The higher synthetic index comes from the internal market with higher employment and new orders indices. Internal market seems to be more robust than it was; this could be interesting in the future in analyzing Abe’s economic policy.

In Asia (chart 2) the situation is still weak except in Japan. The two Chinese indices show fragility. The PMI/Markit/HSBC was at 48.2 in June (49.3 for the flash estimate one week ago) and the official index was at just 50.1. South Korea and Taiwan are pulled down by this lower dynamic in China. This is not the case in Japan where non-orthodox economic policy leads to a countercyclical trend. This could give idea to other countries in the region.

The lower Chinese index pulls down the BRIC index in the first chart. Indian and Brazilian indices are almost unchanged in June compared to May and the Russian index is higher. But by construction the BRIC weighted index is strongly dependent on China. We cannot expect an impulse from these countries that could improve rapidly global growth.

In the USA the ISM index is back above the 50 threshold but just marginally at 50.9. It was 49 in May. The index details show that 4 of 5 components are higher in June. Employment was clearly weaker at 48.7 versus 50.1 in May. Nevertheless all these figures do not show a strong recovery as the New Orders index to Inventories index ratio is still close to 1. The PMI/Markit index for the USA (see Chart 1) is almost stable at 51.9 versus 52.3 in May. The main difference with the ISM index is on the New Export Orders index. It is up for the ISM and down below 50 for the PMI/Markit.

The two indices clearly show that the American economy is not very strong. Nothing in the data can let expect a strong recovery. This does not brought new clear information on the Fed announcement on June 19th. We’re not convinced that the US economy is on a strong upward trend that could necessitate the end of QE.

In the Euro Area the trend appears to be stronger than what was seen few months ago. This can clearly be seen on Chart 3. The index is still below the 50 threshold at 48.7 vs 47.8 in May but the contraction pace is slower and we can see from the chart a kind of common trend for all the Euro Area countries except for Greece. Two countries are particularly interesting. It is Spain and Italy. I talked about them earlier (see here). France is stronger than it used to be and Germany suffers from the Asian weakness for its exports (Asia ex japan is an important export market for Germany, more important in size than the USA).

The South is recovering more quickly than the North. Improvement in Spain and Italy is dependent on trade with neighbors. The momentum could increase if Germany plays a cooperative game by improving its internal demand. Angela Merkel has spoken a lot of lower taxes. This could be the recipe to rebalance Euro Area dynamics. Southern countries are on a stronger trend and Northern countries could improve their demand. That could be a way to exit recession and to improve output and employment.

Chart 1

Chart 2