Global Economy Shows Signs of Pulling Out of Its Slump

Date: Wednesday, June 24, 2020
Source: The Wall Street Journal

Countries that imposed some of the strictest lockdowns are seeing an economic rebound, but path to recovery could be long and bumpy

The global economy is gradually pulling out of its stall as businesses reopen after pandemic-induced lockdowns, with output contracting at a slower pace in the U.S., Europe and Asia this month, according to surveys of purchasing managers.

A composite index produced by data firm IHS Markit pointed to a more gradual decline in business activity in the U.S., suggesting a possible rebound in the coming months.

The firm’s U.S. purchasing managers index for manufacturing was 49.6 and its services index was 46.7 in June, in both cases the highest reading in four months. The composite index on the month was 46.8, also the highest in four months.

A level below 50.0 points to a decline in activity, while a reading above that mark points to an increase. 

The data could be a sign that the sharp drop in economic activity that started in March, when coronavirus cases began to rise, could be bottoming out. Still, the U.S. economy will likely remain weaker than it was at the beginning of the year for some time.

“The big picture is that the economy is now on the road to recovery following the coronavirus lockdowns,” said Andrew Hunter, senior U.S. economist at Capital Economics in a note to clients.

Chris Williamson, chief business economist at IHS Markit, said output and employment were falling at “far more modest rates” in both the manufacturing and service sectors.

“The improvement will fuel hopes that the economy can return to growth in the third quarter,” he said.

The slower decline, albeit tentative, is most visible in countries that issued stringent stay-at-home rules during the coronavirus pandemic, where economic activity fell sharply in March, April and May.

The lifting of many of those restrictions appears to have led to a stronger rebound in June, and surveys in some instances showed an expansion.

In the eurozone, the composite Purchasing Managers Index—a measure of activity in the manufacturing and services sectors—rose to 47.5 in June from 31.9 in May to reach its highest level since February, the month before lockdowns began.

The composite PMI for France rose to 51.3 in June from 32.1 in May, indicating an expansion in private sector activity for the first time since February.

But the surveys also recorded continued declines in activity in countries that imposed softer lockdowns, including Germany and Japan. The latter recorded a sharper drop in manufacturing activity than in May, suggesting the path back to where the economy was before the pandemic will likely be long and bumpy.

A rise in new coronavirus cases in the U.S. could prompt officials to impose new lockdown measures, possibly affecting the nascent U.S. recovery.

Cases are increasing in Arizona, South Carolina, Florida and Texas, where Gov. Greg Abbott said Monday he wouldn’t slow the state’s reopening plans even though cases were rising at an “unacceptable rate.”

“Any return to growth will be prone to losing momentum due to persistent weak demand for many goods and services, linked in turn to ongoing social distancing, high unemployment and uncertainty about the outlook, curbing spending by businesses and households,” Mr. Williamson said. “The recovery could also be derailed by new waves of virus infections.”

Federal Reserve officials have cautioned against reacting too strongly to hints of positive data, noting that the U.S. faces a long road to recovery.

“It’s just going to take a long time, I think, to get back to where we were in February,” Cleveland Fed President Loretta Mester said last week.

Some U.S. companies reported a pickup in demand in June and said they were able to pass on higher input costs to their customers. Companies had also been able to shrink their backlogs of orders.

Job cuts continued although at a slower pace, according to IHS Markit, and firms expressed confidence that activity would pick up in the coming months.

In France, new orders goods and services fell only slightly, and the drop in payrolls also eased. Australia experienced a return to growth, with its composite PMI jumping to 52.6 from 28.1. But while activity in the services sector grew again after five months of declines, manufacturing production recorded a slight drop and businesses said they cut employment.

In the U.K., the world’s sixth largest economy, the manufacturing sector returned to growth, while the contraction in the services sector eased.

Signs of a return to growth in France and Australia, combined with indications of stabilization elsewhere, come as economists are reassessing their most pessimistic projections for the global economy during the three months through June.

They still expect to see the sharpest contraction on record for many parts of the global economy in the second quarter, but are moderating their estimates of the size of that decline in output amid signs that consumer spending has picked up in recent weeks and job losses are smaller than feared.

German bank Berenberg last week said it now expects the U.S. economy to contract by 4.1% this year, having previously expected to see a 6.1% drop in output. For the eurozone, the bank’s economists now forecast a contraction of 9%, rather than the 9.6% previously forecast.

One consequence of the lockdowns that spread around the world has been a collapse in exports and imports. But the World Trade Organization on Monday said it is now unlikely that trade flows will fall by a third this year, an unprecedented drop it said was possible in April.

“The fall in trade we are now seeing is historically large—in fact, it would be the steepest on record,” said Roberto Azevêdo, the WTO’s director-general. “But there is an important silver lining here: it could have been much worse.”


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