Global economy stuck in low-growth rut as manufacturing stagnates

Global manufacturing activity was in a stagnation rut in May with factory output from Asia, Europe and the Americas barely improving, surveys published Wednesday showed. The Organisation for Economic Cooperation and Development (OECD) also issued a gloomy report Wednesday, which said that the global economy is stuck in a low-growth trap that will require more coordinated and comprehensive use of fiscal, monetary and structural policies to move to a higher growth path and ensure that promises are kept to both young and old.

The global manufacturing sector maintained its lethargic start to 2016. At 50.0 in May, the J.P.Morgan Global Manufacturing PMI (purchasing managers' index) — a composite index produced by J.P.Morgan and Markit, a London-based data index firm — registered a reading identical to the no-change mark to signal a broad stagnation of industry. Rates of expansion in production and new orders also eased to a near-stagnation, while the pace of contraction in new export business was one of the steepest during the past three years. The muted performance of manufacturing was also reflected in the labour market, as staffing levels fell for the fourth straight month.

Growth in the Irish manufacturing sector moderated further in May, with the latest improvement in business conditions the weakest since July 2013 — however, Irish data is very volatile and is distorted by tax avoidance e.g. overseas contract manufacturing.

Markit/CIPS UK manufacturing purchasing managers' index showed a reading of 50.1 in May, up from 49.4 in April, which had first contraction for more than three years.

Howard Archer, chief UK and European economist at IHS Global Insight, said the manufacturing sector was "essentially at a standstill in May" while Rob Dobson, senior economist at Markit, added: "Softer global growth is weighing on new export orders. There are also signs that increased client uncertainty resulting from slower growth and the forthcoming EU referendum is weighing on investment spending."

The Institute for Supply Management on Wednesday said its index of US manufacturing activity rose to a higher-than-expected 51.3 in May, from 50.8 in April.

Markit in its American survey showed production volumes falling for the first time in over six years, although the headline figure of 50.7 indicated the sector was still expanding.

Markit also reported Wednesday that Euro Area PMI fell to a three-month low in May, with downturns continuing in France and Greece, but overall PMI was still expanding. Factory activity in Japan fell to a three-year low in May, Markit said. In China, the official measure of the manufacturing sector held at 50.1 in May, still in expansion. However the measure of private sector activity in May was the 15th straight month that index has been in contractionary territory.

Angel Gurría, OECD secretary-General, said at the launch of the latest Global Economic Outlook during the Organisation’s annual Ministerial Council Meeting and Forum in Paris:

Growth is flat in the advanced economies and has slowed in many of the emerging economies that have been the global locomotive since the crisis. Slower productivity growth and rising inequality pose further challenges. Comprehensive policy action is urgently needed to ensure that we get off this disappointing growth path and propel our economies to levels that will safeguard living standards for all.

The OECD said weak trade growth, sluggish investment, subdued wages and slower activity in key emerging markets will all contribute to modest global GDP growth of 3% in 2016, essentially the same level as in 2015, according to the Outlook. Global recovery is expected to improve only to 3.3% in 2017.

Among the major advanced economies, the moderate recovery will continue in the United States, which is projected to grow by 1.8% in 2016 and 2.2% in 2017. The euro area will improve slowly, with growth of 1.6% in 2016 and 1.7% in 2017. In Japan, growth is projected at 0.7% in 2016 and 0.4% in 2017. The 34-country OECD area is projected to grow by 1.8% in 2016 and 2.1% in 2017, according to the Outlook.

With rebalancing continuing in China, growth is expected to continue to drift lower to 6.5% in 2016 and 6.2% in 2017, supported by demand stimulus. India’s growth rates are expected to hover near 7.5% this year and next, but many emerging market economies continue to lose momentum. The deep recessions in Russia and Brazil will persist, with Brazil expected to contract by 4.3% in 2016 and 1.7% in 2017.

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