10/5/21: Ireland PMIs for April: Rapid Growth and Inflation Signals

Ireland's PMIs have accelerated across all two key sectors of Services and Manufacturing in April, while Construction Sector continued to post declining activity (through mid-April).

Irish Manufacturing PMI rose from 57.1 in March to 60.8 in April as larger multinationals boosted their activities and increased pass-through for inflation. This marks third consecutive month of increasing PMIs for the sector. Meanwhile, Irish Services PMI rose from 54.6 in March to 57.7 in April, marking second consecutive month of above 50 PMIs readings. 

In line with the above developments, official Composite PMI rose from 54.5 in March to 58.1 in April. 

Irish Construction Sector PMI, reported mid-month, was at 30.9 (significantly below 50.0, signaling strong rate of contraction in activity) in mid-April, a somewhat less rapid rate of decline relative to mid-March reading of 27.0. All in, Irish Construction Sector PMI has been sub-50 for four consecutive month now.

In contrast to Markit that publishes official Composite PMI, I calculate my own GVO-shares weighted index of economic activity across three sectors: my Three Sectors Index rose from 55.0 in March 2021 to 58.3 in April. 

In terms of inflation, Services PMI release states that "Cost pressures remained strong in April, linked by survey respondents to labour, insurance, fuel, shipping and UK customs. The rate of input price inflation eased slightly from March's 13-month high, however. To protect profit margins, service providers raised their charges for the second month running. The rate of charge inflation was the strongest since February 2020, albeit modest overall." The indications are that Irish services firms are operating in less competitive environment than their global counterparts, with stronger ability to pass through cost increases into their charges. However, this feature of Irish data most likely reflects the accounting complexity within major multinationals trading through Ireland. 

Similar situation is developing in Manufacturing: "Supply chains remain under severe pressure, with longer delivery times owing to new UK Customs arrangements, transport delays and raw materials shortages. These factors, combined with strengthening demand, are leading to a heightening of inflationary pressures. Input prices increased at their fastest pace in ten years, while output prices rose at a series-record pace."

All in, we are witnessing signs of continued inflationary pressures across a number of months now, with even multinationals - companies using Ireland as primarily a tax and regulatory arbitrage location for their activities - feeling the pressures. This is an indication that inflation is building up globally and, as time drags on, starting to feed through to final prices of goods and services.

7/4/21: Ireland PMIs for March: Growth and Inflation Pressures

 

Ireland PMIs for 1Q 2021 are out this week, so let's take a closer look at monthly activity data. 

• March services PMI came in at a surprising 54.6 - up on 41.2 in February and 36.2 in January. Given the country is in a phase 5 lockdown, and there has been little change on that in recent months, the new reading is a bizarre one. Per Markit: "Three out of four monitored sub-sectors registered higher business activity in March. The strongest rate of expansion was in Financial Services, followed by Business Services and Technology, Media & Telecoms respectively. Activity in Transport, Tourism & Leisure declined for the eighth month running, but at the slowest rate since last August." A lot of hope-for vaccines and 'getting back to normal' as well as exports rise behind these figures. Services PMI is now at its highest reading since February 2020.
• March Manufacturing PMI also performed well, rising to 57.1 from 52.0 in February. Manufacturing index has been more volatile in the pandemic than Services, so this rise is less of a surprise, given the global economic recovery and demand for Irish exports.
• We do not have full March data for construction sector PMI, which is reported mid-month, so all we do have is mid-March reading of 27.0. 

Official Composite PMI published by Markit was pretty upbeat in march 2021, rising to 54.5 - signaling strong growth, having previously posted 47.2 in February and 40.2 in January 2021. My own, Three Sectors Activity index - a weighted average of three sectors PMIs based on their share of gross value added - rose even more sharply: from 41.8 in January and 45.0 in February to 55.0 in March. If Construction sector PMI were to come in on-trend mid-April, the Three Sectors Index will be closer to 55.1-55.2 range.

As an aside, it is worth noting that Irish economic activity is showing similar trend to global activity when it comes to inflationary pressures (see: https://trueeconomics.blogspot.com/2021/04/5421-heating-up-inflationary-risks.html). Per Markit: "March data indicated soaring cost pressures. The Composite Input Prices Index posted a record one-month gain and signalled the fastest rate of inflation since July 2008. Cost pressures were much stronger at manufacturers than service providers." In other words, even small open economies with massive distortions coming from the multinationals' financial and tax engineering sides are now showing signs of heating up inflation. 

26/12/15: A Trendless World of 'Recovery'?

Anyone watching financial markets and economics in 2015 would know that this year was marked by a huge rise in volatility. Not the continuous volatility along the established trend, but a 'surprise' volatility concentrated on the tails of distributions of returns and growth numbers. In other words, the worst kind of volatility - the loss and regret aversion type.

Here are two charts confirming the said pattern.

Starting with asset classes:

Source: BAML

In the 'repaired' world of predictable monetary policy with well-signalled forward guidance, 2015 should have been much calmer, as policy surprises were nowhere to be seen (Bank of Japan continued unabated flooding of money, while ECB embarked on its well-in-advance-flagged QE and the Fed 'cautious rates normalisation' switched was anticipated for months, amidst BOE staying put, as predicted by everyone every time London committee met). Alas, that was not the case and 2015 ended up being a year of more extreme shifts into stress than any other year on record.

Likewise, the U.S. economic growth - the most watched and most forecasted series in the global economy - produced more surprises for forecasters:

Source: Goldman Sachs

Per above, 2015 has been a second consecutive year with U.S. GDP growth surprising forecasters to the downside. Worse, yet, since 2001, U.S. GDP growth produced downside surprises compared to consensus forecasts in 12 out of 15 years.

In the past cycles, the early 1990s recession produced an exit from the downside cycle that resulted in 2 consecutive years of upside surprises in growth; for the exit from the 1980s recession, there were five consecutive periods of upside growth relative to the forecasts. Even in the horrific 1970s, the average forecast over-optimism relative to outrun was closer to zero, against the current post-recessionary period average surprise to the forecast being around -0.5 percentage points.

In other words, if you need a confirmation that four years after the 'recovery' onset, the world of finance and growth remains effectively 'trendless', have another look at the charts above...

1/1/2013: Recovery in Asia? Well... not so fast, folks

The Year is only 1 day old (almost) and the trigger-happy Bulls' headlines are all around. Forget the 'Fiscal Cliff' non-solution in the US (it kicked the can of excessive deficits by about 1 month out, before uncertainty about the longer term outlook returns with renewed 'negotiations' and it failed completely and spectacularly in even approaching any workable solution to the US debt overhang). The chirpy sound of 'optimism at any cost' is now coming out of Asia.

Today, we saw Korean and Taiwanese PMIs released. Here are the facts:

• HSBC South Korea PMI for manufacturing sector rose from 48.2 in November (outright recessionary levels) to 50.1 in December. Now, 50.1 sounds like being above 50 (the 50 points mark identifying level of activity consistent with zero growth on previous month), statistically it is not significantly distinct from 50.0 or, for that matter, from 49.9. In other words, since May 2012, PMI registered continuous consecutive contractions in the manufacturing sector, compounded over time. In December, there was effectively zero growth from the bottom levels of November. And this some media heralded as the 'return' to growth. Worse, new export orders - the staple of Korean economy, continued to contract in December for the seventh consecutive monthly period.
• Taiwanese PMI did pretty much the same, rising from an outright contraction of 47.4 in November to 50.6 in December. Taiwanese level of activity (at 50.6) was probably statistically significantly above 50, but hardly anywhere near the levels consistent with a definitive growth trend. This was the first above-50 reading in 7 months and was underpinned (positively) by expansions in both new orders and exports orders. Importantly, input prices rose in Taiwanese manufacturing sector, while output prices shrunk - profit margins, therefore, have dropped - a trend established for at least 3 months now.

Meanwhile, unreported by the Bulls:

• Vietnam manufacturing PMI sunk to 49.3 in December from 50.5 in November, with 8 out of last 9 months posting contracting activity.
• Indonesia's manufacturing PMI remained above the 50.0 line at 50.7 in December, but growth fell from 51.5 in November.
• Earlier report from China showed December manufacturing PMI at 51.5 up from 50.5 in November, "signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011." But new export orders actually fell in December after a 'modest increase in November', which implies that China's manufacturing 'revival' is driven most likely by state spending boost, not by any 'resurgence in global economic activity'.
• And Australian manufacturing PMI was continuing to tank in December: "Manufacturing activity contracted for a 10th consecutive month in December, with the seasonally adjusted Australian Industry Group Australian Performance of Manufacturing Index recording a level of 44.3, unchanged from a slightly upwardly revised reading of 44.3 one month ago. The slump in manufacturing new orders also extended into the 10th month albeit at a slower rate, reflecting weak global demand and a softening Australian economy. The new orders sub-index rose 1.6 points to 45.7 in December."

So, pardon me, but what 'resurgence in Asia'?