Listen: The Decisive | Episode 15 - PMI in Focus: Trade trends and political uncertainty

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Paul Smith   00:00:00

Welcome to our latest PMI-based podcast from S&P Global Market Intelligence. I'm Paul Smith, a senior economist at S&P specializing in the production of the Purchasing Managers Indices. I'll be hosting today's podcast, and I'm pleased to be joined in our virtual studio by 2 colleagues. Firstly, we have a fellow senior economist, Andrew Harker. Good afternoon to you, Andrew.

Andrew Harker   00:00:40

Yes. It's good to be back from the summer holidays and back on the podcast. So today, I'd like to talk about the latest events in Kenya, which people might have seen in the news. And I'll also give a quick explainer on our future output data.

Paul Smith   00:00:53

Excellent. Sounds very good. And secondly, we have another senior economist from our team, that's Tim Moore, who joins us on this PMI podcast for the first time. Hello to you, Tim.

Tim Moore   00:01:05

Hi, Paul, pleasure to be here. Thanks for having me. Looking forward to discussing how this year of elections has impacted our PMI surveys and what we can expect in the coming months.

Paul Smith   00:01:16

Before we get into that, I wanted to open today's podcast with a quick discussion on global trade trends. That's largely triggered by an observation, and I should thank you, Tim, for this, of course, because you're the one who flagged it to us. August 2024 actually marks 10 years of us collecting and publishing new export orders data for many of our services PMI panels. I think first and foremost, these indices provide a complement to our equivalent data from manufacturing. So we really are expanding our coverage there, not just for manufacturing, but to a much bigger set of coverage of data. But just thinking about the manufacturing numbers, I know you agree with me, Tim, that that data for manufacturing has proven to be historically a pretty good, or I'd say, an outstanding indicator of global trade trends.

Tim Moore   00:02:11

Absolutely, Paul. Yes, that index itself, I think, would be my desert island statistic. It's a single-figure snapshot of global trade flows based on the export PMIs of 30 or more nations. So yes, more seriously, we do find that monitoring exports via the manufacturing PMIs at the export order stage has a natural lead over official statistics, which tend to be based on customs records as items cross borders. That length of lead is around about 3 months. We also find that it acts as an advanced signal of container shipping freight volumes and air freight transport kilometers. So quite a widely used indicator by our PMI users. If we have a think about what it's showing right now, we can see that the export order volumes on the PMIs are highlighting real fragility on the manufacturing economy. We can see trade flows are back into contraction in August with that month being the weakest so far this year. This really reflects a general slowdown in demand conditions alongside some specific headwinds from geopolitical issues and trade tensions. And we would contrast that with some of the more resilient trade data and indeed PMIs that we saw in the second quarter of this year. So a definite turnaround. And then when we start to look by country and by sector, a much bigger picture emerges. For instance, we can see that Germany is at the bottom of the pile internationally, languishing there as the autos recession bites. And as we look ahead, the potential impact of tariffs is something that we'll be monitoring closely with the export PMIs.

Paul Smith   00:03:47

Some pretty big global themes there being picked up by the data. Now I think just to obviously come back to my original services exports data, and hopefully, this would help you out a little further if you were stuck on that desert island, Tim. What we did 10 years ago was add some additional layers to that manufacturing figures, really expanding the coverage, adding in our services panels a question on their new export data. So it's a notoriously difficult area, I think, for statistics bodies to cover. But of course, it's incredibly important because the size and impact on and importance for many economies around the world. Now I think looking back over the past decade, I think it's proven to be a pretty important indicator as well. But maybe, Tim, you could take us through a couple of recent examples of that value that you've seen in 1 or 2 economies.

Tim Moore   00:04:41

Yes, indeed, yes, looking at that, as you say, 10-year history of services exports, we can see some clear winners in terms of the boom in cross-border trade and business-to-business trade and services. In the last 10 years, Ireland stands out by far as the strongest performer. More recently, in the last 12 months, India's been topping those international rankings. And what we're seeing in both instances there is strength in technology services and also a reflection of these nations' success in attracting overseas investment and moving up that global value chain on technology services.

Paul Smith   00:05:16

I think that really just speaks to that point, isn't it, of hugely important areas to be thinking about and covering, which once again, the PMI data doing a pretty good job at that. I think just to add another example that I've picked up recently is I look after the Spain PMIs sponsored by HCOB. And I've seen that Spanish growth has tended to outperform other major Eurozone economies over the past 6 months or so, by, I'd say, quite a healthy margin in PMI terms. And that's really shown up in the new export business data, which has revealed the impact on growth in Spain of a really important sector, and that's the tourism sector. And that's, like I said, that's allowed Spain that tourism has really allowed Spain to outperform its peers in recent months. So just a few examples there, I think, of how our subindex for new export business and service has proven to be pretty useful over the past decade. So I really recommend that listeners go out and keep a close eye on some of the indices. So that's one piece of news we've had from our PMI world this month. Something else that Andrew, I think, he wanted to talk about today was recent developments in our Kenyan PMI.

Andrew Harker   00:06:33

Yes, that's right, Paul. As I said at the start, I think people might have seen in the news recently about some protests that happened in Kenya, culminating in an attack on the parliament building there. So just to give a bit of background to this, the protests were triggered by the introduction of a finance bill, which included some tax increases. And this came at a time when people were already struggling with cost of living pressures and quite high inflation in the economy. And so that led to some protests, which were really quite widespread during July in particular, eventually led to that finance bill being pulled, but caused quite a bit of disruption during the month.

Paul Smith   00:07:10

That's great background. How have you seen that affect the actual, you know, the PMI numbers?

Andrew Harker   00:07:16

Yes, we did see quite a big impact in the July PMIs, particularly in terms of the output and new orders indices. So both of those showed sharp contractions during July due to a couple of factors really. One is just the general political uncertainty and instability led customers to sometimes put a pause on projects or not commit to new projects. And then we also had sort of on the physical side of things, just companies not being able to open in some cases due to the protests or customers not being able to get to shops and businesses to make purchases. We also saw an impact on supply chains. So supplies delivery times lengthened amid the disruption caused by the protests. And all this combines to mean that companies sometimes weren't able to get through and complete orders from previous months. And so their backlogs of work rose as well. So quite a few different impacts that we saw in July. And now things did stabilize in August. So it was really July where we saw that big impact.

Paul Smith   00:08:14

And that impact, do you think maybe we could put that into some kind of historical context here? My understanding is outside of kind of the COVID shutdowns in 2020 and 2021, the downturn in July was amongst the steepest we've seen in the survey history.

Andrew Harker   00:08:33

That's right. And so our Stanbic Bank Kenya PMI, the history goes back to just over a decade now. So we've got a decent amount of back history there that we can use to put this latest episode into context. And you're right, as we've kind of seen in probably all our surveys, the nadir of the index is that COVID period where we had lockdowns and lots of businesses just shut up shop for a period of time. But if we take that out of the equation, then this latest downturn that we saw in July was the steepest since late 2017, which was a time when there was a disputed election result and then again to some political and business uncertainty really. The decline in July wasn't quite to that extent, but in a similar ballpark. So I think a similar theme of business, political uncertainty really impacting business conditions.

Paul Smith   00:09:23

So I think that's a nice segue, isn't it into something that I know Tim highlighted at the top of the PMI podcast today was looking at elections and political uncertainty. So that's a good example there of how the PMI can pick up some of the impacts. 2024, of course, has been for many people around the world, a year that has been marked by some kind of political election of some sort. So I think let's broaden out that discussion around elections and economies and how they can affect economic data. So I guess just coming to you first, Tim, what's the best way or how do you usually observe the impacts of elections on economic data?

Tim Moore   00:10:05

Nearly half the global population are going to the polls this year in one way or another. Perhaps the biggest of them all from a market perspective is coming up on November 5 with the U.S. elections, too. So yes, a big focus of ours at the moment in terms of interpreting PMI numbers. And a good question to ask is, well, why do elections induce volatility in PMI surveys? After all, if you think with developed economies, independent central banks are setting interest rates, and they want to avoid politics at all costs. But what we do have in the run-up to an election is unpredictable fiscal policy scenarios. Businesses and consumers around the world are looking at these difficult to forecast scenarios. They're delaying decision-making, holding fire on spending plans and just waiting for that political fog to clear before they go ahead with spending decisions. So as Andrew really touched upon before, the main channel through which elections are impacting the economy and the PMIs is through business and consumer uncertainty. A confused mind doesn't buy, but this is difficult to measure and has powerful impacts on demand.

Paul Smith   00:11:25

How do you see that coming and showing up in the PMI data?

Tim Moore   00:11:29

Good question to ask. Yes, we have to think about what types of purchases are being delayed here. We're not talking about paper clips and toothpaste. We're talking about big ticket items: major new construction projects, real estate, capital spending, lumpy spending that can be delayed and released depending on how the political winds are blowing. So the impact of elections on our PMIs is very much nuanced and sector-specific. And it's also most likely to impact order inflows and projections of output growth rather than our headline activity figures. So really look beyond those headline numbers and dig into the PMI subindices would be the way we look at things. If you take a more detailed example within the U.K. and the service sector, we can see that real estate services, professional services, they had really weak order intakes ahead of the election, the general election in July. And we were heard it reported back many times over by our survey panelists that clients are just waiting to see putting a pause on things. Then at the other end of the scale, tourism recreation, that kind of spending that had little to no impact. I mean, I don't know about you two, but who delays the holiday because of the election? So if we're looking at business expectations, too, as I say, that's another area that PMIs get hit by election uncertainty and volatility. Within U.K. services, we saw confidence dip and then rebound quite sharply in technology services, transportation. So quite a broad range of impacts varying from measure to measure.

Paul Smith   00:13:06

Just to come back to something that you touched upon is you kind of suggested that clients or panelists, I should say, to the surveys are telling us something. That's right, right? We're measuring a little bit more sometimes than just quantitative numbers, right?

Tim Moore   00:13:23

Yes. I mean we're incredibly fortunate that when we go out and do our PMI surveys, our survey respondents give us anecdotal information for why things are moving the way they are. And we take all these anecdotal insights. And as I think you've covered on other series of your podcasts, we turn them into comment trackers, global comment trackers. And something that's coming out at the moment is the number of businesses globally saying they've got a negative outlook due to business uncertainty or political uncertainty. That's now the highest for 5 years. So we can really feel that impact coming in on the month-to-month reports we're getting from businesses all around the world.

Andrew Harker   00:14:02

Yes. Just to sort of back you up on that, Tim, just from looking at our latest U.S. surveys, that really came through in the August numbers and the anecdotal evidence that we got through, particularly on the manufacturing side when it came to new orders, I had quite a few reports of sort of clients putting new orders on hold and just a general wait-and-see attitude. And then looking to the future, a lot of companies indicate that they were optimistic that in a year's time, business conditions will be better. And in a number of cases, they would then link that through to expectations that business will just get back to normal following the election period. So just in the last month, even just a couple of good examples really of what you've been saying.

Paul Smith   00:14:42

So we are effectively seeing the impact right of the U.S. election in the U.S. in that run-up.

Tim Moore   00:15:02

Yes, if we look at a classic pattern in the U.K. this year where we've seen that release of pent-up demand, but has then faded. -- let's just rewind back to May as the general election was called, the economy was humming along nicely, and we saw that real slowdown 1 month ahead of the election, particularly in the domestically focused service economy, construction sector. In fact, it was the biggest monthly dip in services new export orders index for 2 months. So a sizable drop, sizable weakening just as an election approached. But very quickly as the so-called political fog lifted, we saw a rebound in July. And in fact, the biggest new orders rise since February 2023 for both services and construction. So that synchronized post-election boost. So over the course of a few months, we've seen that cycle of volatility flattering economic performance in the third quarter of this year. That has now faded in the U.K. as we've seen business expectations move on from the election itself to some short-term worries about the autumn budget coming up. So yes, to summarize there, I've been bashing the stats for you. As PMI users will know, we've been doing composite PMIs for just over 25 years now, and that spans 6 elections in the past. And since an election has been called in the U.K. to 6 months later, the U.K. PMI has fallen 5 out of the last 6 elections. So that gives you an indication of how quickly a short-term boost or an economy that's been humming can then turn around quite quickly. In many respects, it's worth remembering that today's newspaper is tomorrow's fish and chip paper bill.

Paul Smith   00:16:51

A very U.K. reference there isn't about fish and chips and definitely speaks to my heart as a man from the East Yorkshire Coast in England. You make me all misty eyed about my fish and chips from younger days. Of course, what you've spoken about there is a little bit U.K. specific. Of course, we don't know whether that's going to be replicated, of course, in other areas. But I think that gives some really interesting insight into the kind of dimensions, if you like, of how that general election can impact or any election can impact on the numbers. Just wanted to again take a quick step back though. We're talking a lot here about business expectations data, Andrew, aren't we? PMI data are usually seen quite rightly as factual data sets, but that speaks a little bit more to sentiment, right?

Andrew Harker   00:17:40

Yes, that's right. It's a bit different from the other indices we cover. So I think definitely worth sort of delving into that and explaining it a bit more. because it is actually an index that we include on pretty much all our surveys, whether it's manufacturing services, construction, whole economy, they all have this forward-looking future output or future business activity index on them. So as we mentioned, normally, we're talking about factual based looking back over the previous month. Has your output orders, employment, prices, et cetera, gone up, down or stayed the same? But when we're looking at future output, we're asking companies to project 12 months into the future and say whether they think their activity is going to increase or decrease over the coming year. So that really gives us a really good indicator of current business confidence we find, how companies are feeling about current conditions and looking forward to the next few months. In terms of interpretation, it's worth thinking about that because while we have -- the index is calculated in the same way as all the others. So we've got that 50 no change mark where the index is above 50, companies are expecting a rise in output over the coming year, below 50, the opposite. But what we find is that the future output indices tend to almost all the time be above 50, which kind of makes sense because if you think about it, a business is generally going to be expecting to grow over the coming year, they're going to expect that their business will continue to thrive and flourish. So what we need to do is we need to put the numbers in context when we're trying to interpret the data, not just look at the number itself. And we tend to do that by using the series average and just comparing the latest number against that. So for example, if we take the U.S., we can see that at the composite level, the future output index is above that 50 mark. So companies are expecting output to increase over the coming year. But it's just a touch below its series average at the moment. So suggesting that maybe firms aren't quite as bullish as they normally are, maybe a little subdued linking through to that sort of uncertainty that Tim has been speaking about through the episode.

Tim Moore   00:19:44

Yes, absolutely. I mean what we're looking for with those business expectations indices is to capture changes in sentiment. We're not that interested in confidence in an absolute sense. It's getting that snapshot in time and how it's changed. And this can be very sensitive to collection dates as well. We saw it just ahead of all the global lockdowns in February 2020. And if you fast forward to the present day or even looking ahead, we've got the November U.S. Flash PMI survey. Now that's going to be collected from the 12th to the 20th of November. So very soon after we get the election results with the Flash PMI itself published on the 22nd. So in just a matter of weeks, we'll see how business sentiment may have evolved in the month of November in the U.S. and added to that, how it may have influenced PMI business expectations all around the world heading into 2025.

Paul Smith   00:20:38

Yes, it's something definitely for us to be looking forward to in a couple of months. And as you quite rightly point out, it's not going to obviously impact the U.S., but it will -- we'll get to see how it lands around the world, something that we are very well placed to see with our internationally comparable PMI indices from around the world. Taking a bit of a time check, I think it's a good place for us to wrap up today's discussion. So thank you to both Andrew and Tim, of course, for your insights, and we look forward to discussing some more PMI themes at our next podcast later in the year.

Kristen Hallam   00:21:16

Thank you for listening to The Decisive podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.