Presentation

Paul Smith

Hello, and a warm welcome to the latest PMI based broadcast from S&P Global Market Intelligence. I am Paul Smith, an economist in the team that produces PMI data for over 40 countries around the globe. And I'm delighted to be joined today by 2 colleagues for what is, after short hiatus, our first PMI podcast of 2024. So firstly, let me introduce our regular contributor to these podcasts, Andrew Harker. Hello to you, Andrew. Hope all is well. And hopefully, you've got some great content lined up for us today.

Andrew Harker

Hello, Paul. Good to be back. Yes, as you said, we've had a bit of a winter break, haven't we? It's good to get the podcasters coding season back underway. Today, I'm quite keen to talk about what's been happening in the Red Sea and some of the impacts on the global economy from that disruption that people probably will have seen in the news. We've also got some good news coming out of Greece. So looking forward to sharing that with you as well.

Paul Smith

Sounds very topical as always. And secondly, we've got another follow economists from our PMI team, Eleanor Dennison. A warm welcome to you, Ellie, and similarly, hope all is well, and you've also got some great topics lined up for us today.

Eleanor Dennison

Hi, Paul, yes, indeed, this is my first experts on the podcast. So thank you for the warm welcome. It's great to be joining you both today, and we definitely got some interesting topics to discuss, particularly our new Romania manufacturing PMI.

Paul Smith

Fantastic. So I think we'll cover Romania towards the end of our 20 minutes or so. But first, let's kick off with you, Ellie. And I think you're going to give us an overview and some recent developments on a sector of the European economy that perhaps sometimes goes a little bit under the radar of PMI data that's our European construction surveys. And more specifically, you're going to kick off by giving us a little bit of a look at the Italian construction sector.

Eleanor Dennison

Yes. So I'm also responsible for reports for Italy, which we're in partnership with Hamburg Commercial Bank. We actually produced 3 reports each month: Manufacturing, services and perhaps less well known, we also report on the construction sector. Something I have particularly found interesting is the performance of this sector over the past 6 months or so.

The construction sector has really shown resilience in recent months, during the tail end of 2023 when the Italian services and manufacturing sectors were both in negative territory. The building sector was, in fact, reporting growth. Construction activity has been rising for 5 successive months now and output peaked in December last year and at this time, growth was strong. But in recent months, this trend has tailed off and APA has moderated towards the all-important 15 no change mark.

Question and Answer

Paul Smith

So it's been a pretty positive picture from what I can gather there, albeit you said growth kind of peaked a pretty decent rate at the end of the year, but has tailed off subsequently, any reasons for that?

Eleanor Dennison

Yes. So one of the reasons for strength across the sector towards the end of 2023 was the government super bonus scheme. And just to briefly explain, this was a 110% eco-bonus tax credit provided by the government for the purpose of making home improvements, for example, to increase energy efficiency.

And towards the end of last year, our anecdotal evidence showed that firms often linked to the increase in output to the imminent closure of the 110% super bonus with firms often racing to complete these orders. After this peak in activity in December, as I previously mentioned, growth continued, but then at a notably lesser pace.

Paul Smith

So still a positive picture, of course, in Italy. And I'm interested to know how Italy is comparing to other economies in the Eurozone in terms of their construction sectors, such as Germany and France, for instance.

Eleanor Dennison

If we're looking at two of Italy's main trading partners, like you say, Germany and France, the story differs hugely. Our PMI data highlights that construction activity in Germany has been falling in each month for the best part of 2 years now, where in the past year, the rates of decline have been steep.

Meanwhile, in the French construction sector, it also has been in contraction territory, though at a slightly less aggressive pace compared to Germany as well the overall sentiment among Italian constructors has been positive, but that's not the case in Germany and France. Perhaps this is due to the size of the EU's national recovery and resilience package for Italy.

Paul Smith

We can really say can't we that the differences seem to be very much linked to public and, I guess, government policies with that super bonus scheme that, as you say, is now closed. So some really interesting dynamics there, I think, between different performing construction sectors and how Italy is, I guess, booking a wider European trend at the moment.

Another area that is, I think, bucking, shall we say, the Eurozone trend is in manufacturing in Greece, which I think, from my understanding is performing better than the Eurozone average at the moment on the manufacturing side. Andrew just got to come to you on this, can you tell us a little bit more of what's going on in Greek manufacturing at the moment?

Andrew Harker

Yes, absolutely. That's right. It is booking the trend because if you think about it, people might be aware that we've seen our data on Eurozone manufacturing, which has been showing the sector struggling quite a bit recently and in contraction mode, but the opposite has been true for Greece actually. It's been in growth.

And if you look at the latest data, which we got for February, and we actually saw the PMI at a 2-year high. We saw sharp and accelerated growth of output new orders, exports arising, firms taking on extra staff. And they're also quite bullish about the future as well, which is, in some parts, linked to the prospects for investment.

And that investment is actually brought out as well by our business outlook survey, where the latest results showed that Greek firms were among the most confident worldwide in terms of their approaches to investment in things like capital expenditure and research and development over the coming year.

Paul Smith

Quite a bright spot of, as you say, a fairly subdued Eurozone manufacturing economy at the moment, but something that I would have thought maybe would have had an impact on weak manufacturing given its kind of geographical position and we see lots of close ties to shipping and sea trade would be the recent disruption in the Red Sea. Have you seen any impacts from recent events on the Greek manufacturing sector?

Andrew Harker

It's good to mention that sort of geographic proximity to Suez Canal in particular right there. And you also added to that, Greece control is the largest merchant shipping fleet in the world. So I think those things combined mean that it's quite a useful place to look for if you're looking to try and see what any impacts of the disruption Red Sea have been.

And there have been impacting. We can see suppliers delivery times lengthening quite sharply. So a lot of delays in terms of firms getting hold of inputs. And that's making it harder for them to replenish their stocks, which are being used up despite them actually ramping up their purchasing activity and trying to get more stuff in. We also see an impact on prices.

So if you think about it, the extra shipping costs required to move goods over that larger distance geographically, it is going to add to your shipping costs, and so that's feeding through to higher input prices. So it definitely has been an impact. But fortunately, not enough to derail the period of growth up until now.

Paul Smith

I appreciate that fact that you pulled out there. I think it was an intent to resurrect an old feature of these podcasts, wasn't it? And factor the month, which I think you used to enjoy. So thank you for that. It's definitely worth a little bit of time unpacking that Red Sea impact on the supply side of the global economy.

Obviously, we've seen a little bit of an impact there in Greece, aren't we? I think supply chain resilience remains such a key topic for many people at the moment, especially in that post-pandemic world that we're living in now and in the context of current geopolitics and various tensions around the globe. Maybe we could just come back to first principles there. How we measure those impacts, Andrew? How do we do it through our PMI datasets?

Andrew Harker

So the best way of looking at it is to use the supplies delivery times index, which we have on all of our manufacturing surveys and whole economy ones as well. And with this index, what we're asking the companies to say is whether the amount of time it's taking for them to receive their goods that they've purchased from suppliers has quickened or lengthened or in fact, just stayed the same from the previous month.

Just in terms of the interpretation, if we get a reading of the index above 50, that means that we're seeing shorter suppliers delivery times in the previous month. Conversely, if that's below 50, then that means that the lead times are lengthening and delays are getting worse.

Paul Smith

About 50 really is the midpoint, might you say that indicates no change in a particular variable. I guess what's interesting then is you've got that number down at 50 number, what's the latest results you're seeing on that index, say, at the global manufacturing level?

Andrew Harker

Our global manufacturing PMI, which is in association with JPMorgan, we calculate that by amalgamating all of our national manufacturing surveys together and weighting them together to get that overall global figure. If I take you back to January, actually, we saw the index actually drop below the 50 mark for the first time in a year. So that showed actually the first lengthening of lead times for a year.

What we saw into February actually was that, that index move back up to pretty much in line with 50, so signaling a bit more of a stable picture. So I think in contrast to what we saw in that post-pandemic era where we saw things start to lengthen and then sort of the domino effect where it got worse and worse. Maybe we're seeing a bit of an impact in January and then more stabilization in February, and that's borne out by the comment tracker data as well.

So this is information that we get from the companies we survey based on anecdote that they put in. We can track that over time as well. So reports of shipping delays in January are around 2.5x normal amounts, and that stayed pretty stable into February as well. So again, pointing to that sense that maybe things are stabilizing a bit.

Paul Smith

We've kind of seen a little bit of an impact, but as you say, things have stabilized. This is not like we saw 2 or 3 years ago during the pandemic for context and numbers were in the 30s, were extremely low readings or so much disruption from the pandemic. I guess what's interesting though is, obviously, we said there's been some challenges in Greece, but the global level is really quite a muted impact. So how are you reconciling that? Is it localized issues rather than a global problem, that's the reading that I'm getting from that.

Andrew Harker

This is where having the PMI in so many different countries is really valuable actually. You can really drill down and see where the pinch points are geographically. If you look at, say, Asia, for example, we've not really seen any particular impact there from the trouble in the Red Sea. Over in North America, we saw that again, similar to the global level, a bit of impact in January, but then that eased off again into February.

In Europe, a bit of a mixed picture really, even in Europe, where you probably expect most of the impact to be. So we've obviously managed Greece. Also the U.K. and Spain quite badly affected in the data there. But in other parts of the continent, for example, Germany, Austria, the Netherlands still seeing their supplier delivery time shortened. So even within Europe, there's quite a mixed picture geographically, depending on where countries are.

Paul Smith

I am going to bring you back into the conversation, Ellie. What are you seeing in terms of prices? Andrew said there was some impact maybe in Greece, but are we seeing a similar development, a wider regional level there in terms of prices? We usually associate changes in supplier delivery times to then future changes in prices. So I just wondered what you're seeing from that angle?

Eleanor Dennison

Across the Eurozone, there's definitely been some impact on cost pressures faced by manufacturers, but this has been somewhat muted given the general demand conditions of the sector. When we look at the panel comments tracker data that Andrew mentioned earlier, we've seen a rise in the number of mentions that Link increased operating expenses to higher shipping fees.

In February, our data indicated there are over 4x as many comments in that month, blaming cost inflation on higher shipping prices compared to the average trend and this was the highest for 13 months. If we consider the trend for other inputs, for example, raw materials, our data shows that less firms are specifically blaming input price inflation on rising raw material prices than in previous months.

And this sheds some light on the demand conditions of the manufacturing sector across Europe, which have been subdued for some time now. So overall, I'd say that the impact on prices is there, but if demand was strong, perhaps the impact would be larger.

Paul Smith

Demand element, that's a key thing as well. It's obviously nothing like the pandemic in terms of global shipping, it's fairly localized in terms of the Red Sea impact. And then like you say, global manufacturing means in a fairly subdued position at the moment in contrast, of course, to what happened during the pandemic. So I think just to bring this section to some kind of close, it's been muted impact at the moment, and it's really quite relatively localized without predominantly in I think Andrew said, Spain, Greece, U.K., really kind of European sea trading nations.

So, I think those are the ones who seem to have felt the most impact so far. So I think we said at the top of the podcast, we'd look a little bit towards a new PMI survey that we've just recently launched. Through this following hot on the heels of the newly minted calendar services PMI that we launched at the end of last year, which was our first launch since 2019.

So like I said, we're going to discuss another one here, Romania manufacturing PMI and that's something that you've been really closely involved with this, Ellie. Maybe you could tell us a little bit more about the survey. And I'm presuming the structure and approach is very similar to what I'd call a classic PMI. We've been doing PMI surveys in Europe, at least for the quarter of the century in many countries around Europe. So over to you, you give us a little bit of an overview of how the PMI set up in Romania.

Eleanor Dennison

Yes, it's definitely really exciting that we've now launched a manufacturing PMI in Romania with our sponsor, the Commercial Bank of Romania. So the methodology, as you say, here follows the existing manufacturing ports that we already provide. And this is where companies are surveyed on a monthly basis, and they're asked whether they've experienced any change in the month.

For example, is the level of your output at your unit in terms of volumes, higher and lower than 1 month ago? For this, we cover a wide range of indices, including upper orders, some prices data and some inventory data. The panel in Romania is made up of about 400 manufacturing firms. And then this is stratified by detailed sector and company workforce size based on their contribution to GDP.

We started collecting the data for Romania back in July last year. So we've currently built up 8 months of back data. And even in the early months of the survey, data has been shown to track official data, for example, our output PMI with industrial production.

Paul Smith

Obviously, a short data history, but everything else is very much the same as all our other surveys across Europe and across the world, of course. And I think that's one of the key advantages, of course, of the PMI is that comparability between nations, one of the few statistics that you can directly compare with each other. But what are the reasons do you think it's important that we've launched this survey with BCR, Ellie?

Eleanor Dennison

Romania is actually the second largest consumer market in Central and Eastern Europe, making it a very important economy. This, therefore, fills a data gap in this region and is aimed at supporting a range of stakeholders, including policymakers, central banks, investors and corporates. As with our other PMI releases, the data we provide is reliable and timely given that it's released on a monthly basis and is often available months ahead of the official statistics.

Given that the methodology is consistent, like you said before, we can then compare this with other manufacturing PMI, which is a great tool. It's also a really important economy to its main trading partners, for example, Germany, Italy and France, mainly exporting motor vehicle, inputs, parts accessories, inputs related to agriculture, iron and steel, for example. So all these inputs are definitely crucial for other European economies.

Paul Smith

That's great, really plugging data to gap I would say. As ever, we always want to know what the latest numbers are showing as well, don't we so. If you could give us a summary of, I guess, as the February data, wasn't it really, that would be great.

Eleanor Dennison

Absolutely. So to give you a quick round up, the overall results in Romania have largely been in line with that seen across Europe, in general, but demand is really muted. The headline PMI has remained below the all-important 15 no-change mark since data collection began back in July, and this indicates to us that manufacturers are facing challenging operating conditions.

The largest component of the PMI are new orders fell at a strong pace in the most recent survey period in February. And this shed some light into demand for Romania manufactured goods. As a result, firm's input requirements dropped. So purchasing activity at factories has been downscaled each month for the whole of the back history of 8 months.

And on the employment front, after marginal workforce expansion in the opening month of July, firms have been in retrenchment and making cuts in each month since. Finally, cost pressures have remained elevated and manufacturers have raised output charges in 4 of the past 8 months.

Paul Smith

Very similar position to elsewhere across Europe at the moment and relatively subdued the manufacturing picture we've seen. Thank you for that, Eli. And as ever, I think we've packed a lot into the latest episode, but just for those listeners who may be interested in learning a little bit more about supply chains outside of the world of PMIs then it's definitely worth checking out some work that we've been doing on the wider S&P Global Group at the moment.

We've got an inaugural issue of look forward supply chain 2024, that's recently been released. What that does it taps into the knowledge of various specialists around the firm, they're looking at areas like labor, geopolitics, shipping, trade, ultimately, to provide a series of articles that go beyond headlines, if you like, and provide a really good critical analysis into global supply chains.

And secondly, for people who are interested in a more comprehensive view of supply chain intelligence then I really recommend taking a look at our supply chain console, which we launched last year. And what that does is it takes priority data and forecast across trade, pricing, economics altogether, help identify some critical factors to help users really understand and build more resilience into their supply chain planning.

So for both that report and the supply chain console, I would just recommend heading over to our website searching up supply chain intelligence or look forward to supply chain in 2024, and you should be able to get some more information on those.

So all that's left thanks again to you, Andrew and to you Eli, for your insights today. And we look forward to seeing you all again later in the year for our next podcast.

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