Economic upturn on shaky foundations
Financial market impact of the flash PMIs was blurred by ongoing concerns over banking sector stress, but where a message was taken it was generally that the surveys continued to point to reduced near terms recession risks, with output growth accelerating across the world major developed economies on average.
However, drill down deeper and the cracks appear. In particular, developed world growth is being driven almost entirely by the services economy, which is surprising given the sector's exposure to higher interest rates and the impact of the cost-of-living squeeze on households. We therefore remain skeptical of the resilience of this upturn, especially as at least some of the recent impetus appears to be derived from short-term factors such as a warmer than usual start to the year and a post-pandemic tailwind for travel.
Meanwhile in manufacturing there were signs of the sector stabilizing after the slump of late last year, but this flat picture is being driven by improving supply rather than any fundamental upturn in demand,. In fact, new orders for goods continued to fall across the four largest developed economies on average, down for a tenth straight month. In short, manufacturers are maintaining production merely by eating into backlogs of work. In the absence of new demand, production growth will inevitably slow. The risk is that, with interest rates being hiked again in March in Europe and the US, such demand improvement looks unlikely. This would leave economic growth dependent on what looks like an unsustainable burst of life in the service sector.
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