Global growth fears have been pronounced recently, fuelled by weak manufacturing data that look especially ominous against the backdrop of elevated trade tension.
Manufacturing activities in most advanced economies have slowed in recent times but this does not perhaps answer a bigger question which is whether the manufacturing recession has started spilling over into the services economy.
Analysts at the Washington-based Institute of International Finance (IIF) have helped solve this puzzle. Findings from their research showed there seems to be little spillover from the weak manufacturing sector to the services economy albeit does not preclude adverse spill over into the economy.
For instance, in the world’s fourth-biggest economy with a market size about $4 trillion, Germany, where manufacturing recession is severe and something of a global outlier, spill over into services are modest.
This bodes well for economies including the United States where manufacturing accounts for a little share of the overall economy.
“We continue to have a relatively upbeat view on global activity, with weak manufacturing the usual up and down resulting from inventory cycles, rather than supply chain disruptions from trade tensions,” IIF’s analysts said in a note to clients.
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The global economy has become increasingly fragile and uncertain, with growth slowing and downsides risks continue to mount. Economic prospects are weakening in developed and emerging markets, and global growth could get stuck at persistently low levels without sharp policy response from the government.
Escalating trade tensions continue to hurt investor confidence, adding to policy uncertainty, rising risks in global financial markets, engendering already weak growth prospects.
This may be why the Organization for Economic Co-operation and Development (OECD) put global growth projection at paltry 2.9 per cent by 2019 in its most recent outlook, the weakest since the global economic meltdown of 2008.
According to IIF’s findings from data compiled on United States’ manufacturing and services purchasing managers’ index (PMIs), as well as GDP growth for the last 19 years, activities in the US moves much more closely with non-manufacturing PMI.
This raises indications that manufacturing weakness has spilt over modestly into the services sector which is consistent given the relatively small weight of manufacturing (11%) in the US economy.
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The same trend according to IIF was observed for Germany where manufacturing activities account for 21 per cent of the economy and downturn in the data was severe, yet there is little evidence of any tangible spill over into services.
Extending the analysis to the UK and France, manufacturing and services PMIs have fallen in tandem, while there has been a meaningful rebound in France, UK saw a decline in both variables potentially due to Brexit uncertainty.
The assertion doesn’t hold water in Nigeria’s case.
Both the manufacturing activities and services sector are expanding at a slower pace in Nigeria whose economy hasn’t recovered fully from a recent contraction in 2016.
While the manufacturing sector continues to face myriads of headwinds including a tough business environment and policy uncertainty, the services sector has shown resilience in surmounting challenges
Looking across emerging markets, Turkey and Argentina stand out for violent dis-investment cycles that approach 2008/09 in severity. But adverse spill over into dis-investment does not look to be a broader phenomenon, with the growth contribution from investment remaining positive and large in key countries.
According to IIF, combining this relatively benign picture with material easing from the world’s key central banks, it paints a picture that is supportive of risk assets, including EM currencies.
