Global business survey heralds inflection in economic activity
A slowdown in global business sentiment is not too worrying at this stage, but further deterioration will trigger downward revisions to GDP projections.
Markit’s world manufacturing purchasing managers index (PMI) dropped from 53.5 in April to 53.1 in May. All in all, the world PMI declined in four of the first five months of 2018. No region has been spared the decline in business sentiment. Nonetheless, the index is still well above the 50 threshold that separates expansion from contraction.
International trade statistics are also showing early signs of deterioration, starting in advanced economies and spreading progressively to emerging ones. Sentiment deteriorated in all five BRICS economies in May (Brazil, Russia, India, China and South Africa). Moreover, sentiment in Russia and South Africa is now slightly below the 50 threshold, signifying a contraction in manufacturing activity.
Deterioration in global business sentiment has direct implications for world GDP growth. The recent decline in world manufacturing PMI is pointing to a slowdown in global GDP growth from 4.7% at the beginning of 2018 to 3.7% at the end of this year. At this stage, the deterioration in world PMI is not dramatic; if it stabilises at the current level, the 3.9% GDP growth expected for 2018 on average would still be achievable. However, further deterioration in sentiment will inevitably trigger a wave of downward revisions in economic growth projections.
On the inflation front, the abrupt decline in price pressure initiated at the beginning of the year was halted in April-May in advanced economies and in May in emerging economies. These developments should support inflation in the months ahead. Inflation in advanced economies is expected to accelerate in the months to come and to climb above 2% (from 1.7% currently), due to base effects, a revival of the traditional Phillips curve and energy prices.