27 Mar, 2023

March flash PMI data signals accelerating developed world economic growth

Economic growth accelerated across the four largest developed economies — the US, UK, eurozone and Japan — on average in March, pointing to surprising resilience amid higher interest rates, the cost-of-living crisis and recent stress in the banking sector.

Growth skewed heavily toward the service sector while manufacturing continued to suffer falling orders. While weakness in demand has helped further drive down inflation in the manufacturing sector, March saw signs of stubbornly elevated service sector selling price inflation and, in some cases, even accelerating inflation.

The resilience of growth and elevated inflation suggests central banks will lean toward further policy tightening in the coming months. It is unclear whether growth resilience can persist as we await the lagged impact of prior rate hikes in an environment of squeezed incomes and increasing financial market uncertainty.

Economic growth revival driven by services

Business activity rose across the four largest developed world economies, also known as the G-4, for a second successive month in March, according to flash Purchasing Managers' Index data compiled by S&P Global. Growth accelerated at the fastest rate since May 2022. The sustained upturn adds to signs that global recession risks have abated — for the near term at least — contrasting markedly with the gloomy picture presented by the surveys heading into last winter.

Growth was recorded in all four economies for a second month running, indicating a broad-based geographical improvement. Growth hit 10-month highs in the US and eurozone while a nine-month high was recorded in Japan. Although growth slowed slightly in the UK, it was nevertheless the second-best reading over the past nine months.

It was a different story by sector, however, with growth largely limited to the services economy. Measured across the G-4, service sector business activity grew at its sharpest pace since April 2022, building on the return to growth in January. Accelerating services growth was seen in all G-4 economies except the UK, where gains occurred at a reduced rate compared to February, linked at least in part to labor shortages.

Meanwhile, manufacturing output fell for a ninth successive month in March, dropping in all G-4 economies barring the modest gain in the US. While the rate of decline moderated, this was in part due to improved supply availability rather than an upturn in demand for goods, with new orders falling in manufacturing for a 10th straight month. This contrasted with an improvement in demand growth for services.

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Unprecedented improvement in supply conditions

The improvement in supply conditions during the month was especially notable, as average supplier delivery times shortened to the greatest extent since comparable survey data was first available in 2007. Faster deliveries reflected an alleviation of pandemic-related logistical issues including container shortages and port congestion, as well as the reopening of the Chinese mainland economy.

Suppliers were also less busy because of reduced demand for inputs from manufacturers around the world, exacerbated by an ongoing trend towards inventory reduction. Stocks of inputs and other raw materials fell in March across the G-4 for the fifth month in a row.

Price pressures driven by services

A corollary of more plentiful supply and falling demand was a further reduction in price pressures in the manufacturing economy. Input prices rose on average across the G-4 at the slowest rate since October 2020. Factory input prices even fell in the eurozone, where lower gas prices have helped further alleviate cost pressures in recent months.

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The reduced upward pressure on raw material prices helped slow inflation for goods leaving the factory gate on average across the G-4, with manufacturing output prices rising at the slowest rate since December 2020.

While cost growth further moderated on average across the G-4 service sector as a whole, prices charged for services rose at a slightly increased rate for a second month running in March. Higher rates of inflation were evident in the US and Japan. Although rates slowed in Europe, in part reflecting the gas price cooling, all G-4 economies continued to see elevated rates of service sector selling price inflation.

Combined gauges of goods and services selling price inflation also consequently rose in both the US and Japan in March. Those measures remained especially elevated in the eurozone and the UK, albeit down sharply from the peaks seen in the immediate aftermath of the invasion of Ukraine.

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Outlook

The March flash PMI data points to encouraging economic growth resilience across the G-4, with output growth accelerating in the first quarter despite uncertainty caused by recent banking sector stress — the latest survey data was collected after March 10 — and further monetary policy tightening.

While rising interest rates appear to have further helped cool inflationary pressures, aided by lower energy prices, a further 100 basis points of combined tightening in March by the major central banks of Europe and the US looks set to pose additional headwinds to demand in the months ahead.

The stubbornly elevated price gauges also imply a strong possibility of further rate hikes in the coming months, especially in light of the resilient current growth picture.

While recession appears to have been averted for now, there remains a strong possibility of substantially weaker economic growth later in the year as the lagged impact of higher interest rates feeds through to the economy. At the same time, the cost-of-living crisis has eroded real incomes, and uncertainty surrounding the banking sector haunts markets. The latter poses an especially important downside risk to growth and will inevitably play a key role in determining the future path of demand as well as future policy decisions.

Purchasing Managers' Index data is compiled by S&P Global for more than 40 economies worldwide. The monthly data is derived from surveys of senior executives at private sector companies and is available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data is used by financial and corporate professionals to better understand where economies and markets are headed and to uncover opportunities.

Data and insights for this article were compiled by Chris Williamson, chief business economist for S&P Global Market Intelligence.