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PMIs signal accelerating economic downturn in November

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PMIs signal accelerating economic downturn in November

Global business activity fell for a fourth straight month in November, with the rate of decline accelerating to one of the fastest since the global financial crisis to signal a deepening economic downturn. The deterioration has also become more broad-based, and Japan has joined the U.S., eurozone, U.K. and mainland China in decline.

While Chinese activity continues to be dampened by COVID-19 measures, the broader global economy remained in the struggle against the headwinds of rising prices, often linked to the energy crisis, low confidence and rising interest rates.

One encouraging development in November was the subduing effect on inflation from falling demand, improved supply conditions and tighter monetary policy, with rates of increase of firms' costs and selling prices cooling further from the peaks seen earlier in the year.

Business confidence in the outlook for the coming year also rose, in part reflecting positive sentiment from lower inflationary pressures and improved supply chains. But the overall degree of business sentiment remains heavily subdued by historical standards, suggesting a global recession remains a distinct possibility.

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Business activity declines at steeper rate

Global business activity contracted for a fourth month running in November, according to Purchasing Managers' Index, or PMI, survey data compiled by S&P Global across over 40 economies and sponsored by JPMorgan. Furthermore, a fall in the PMI from 49.0 in October to 48.0 signaled an acceleration in the rate of contraction to the fastest level since June 2020. Excluding the initial pandemic lockdown months, the latest decline was the steepest since May 2009, during the height of the global financial crisis, and is consistent with global gross domestic product falling at an annualized rate of approximately 1%.

Similar rates of decline were recorded across the manufacturing and service sectors, pointing to a broad-based economic contraction. Furthermore, output fell in both sectors at rates not seen since 2009, barring the initial months of the pandemic.

Broad-based slump across major developed economies

Looking at the major developed economies, output fell in November across the U.S., eurozone, U.K. and Japan to indicate a broadening out of the downturn. The steepest contraction was recorded in the U.S., where the rate of decline accelerated. While the rate of decline eased slightly in the eurozone and held steady in the U.K., barring initial pandemic months, recent months have seen the U.S. and U.K. contract at some of the fastest rates seen since 2009, while the eurozone's downturn has been the steepest since the debt crisis in 2012. Both manufacturing output and service sector activity fell across the U.S. and Europe in November.

Meanwhile, business activity in Japan fell back into decline as a rebound from further post-pandemic reopening lost momentum and manufacturing production lost ground sharply amid slumping global trade.

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Emerging market growth subdued by China

The picture was more mixed across the major emerging markets. Ongoing COVID-19 concerns and associated health restrictions were reported by companies to have contributed to an increased rate of business activity contraction in mainland China, with the Caixin composite PMI output index dropping to its lowest level since May to signal an accelerating rate of decline and a third successive monthly fall in the combined output of manufacturing and services, with both sectors reporting increased rates of deterioration.

Brazil also slipped into decline with output falling marginally for the first time since May 2021. A modest service sector expansion was accompanied by a steep downturn in manufacturing, where factory output fell at a rate not seen since May 2020.

Output in Russia stabilized, as improving domestic demand helped offset the ongoing slump in exports, notably in the manufacturing sector.

In contrast to the stagnation or decline seen elsewhere among the four "BRIC" emerging economies — Brazil, Russia, India and China — India once again reported solid growth of business activity in November. The country continues to enjoy a spell of economic expansion that has been among the best seen over the past decade, reflecting balanced growth across manufacturing and services.

Prospects improved but still subdued

While the current business situation deteriorated, prospects for the year ahead brightened somewhat in both manufacturing and services due mainly to the hopes of cooling price pressures and improving supply conditions, albeit with confidence continuing to run at worryingly low levels by historical standards. While overall future output expectations fell in October to the lowest since June 2020, November's reading is still the second lowest recorded for just over two years.

Future output expectations are running especially low by historical standards in the eurozone and U.K., and remain depressed relative to long-run averages in both the U.S. and mainland China. Above-trend sentiment was still evident in Japan, Brazil and India, though only in the latter did prospects improve compared to October. Sentiment fell especially sharply in Brazil.

Rate hikes dampen demand but also cool price pressures

While the recent tightening of monetary policy in economies such as the U.S., eurozone and U.K. appears to be having an increasingly clear adverse impact on demand, most notably in the financial services and consumer-facing sectors, the recent hikes in interest rates have also been accompanied by a marked easing of price pressures. Lower energy prices have also helped. Measured across manufacturing and services, global input cost inflation slowed in November to its lowest level since February 2021, continuing to fall sharply from the peak rate of increase recorded back in May.

Slower growth of costs in both manufacturing and services have, in turn, led to lower selling price inflation rates in both sectors, which fell in November to the slowest since February 2021.

Most striking has been the extent of the cooling of selling price inflation in the U.S. While rates of inflation have also slowed in the eurozone and U.K., they remain comparatively elevated, linked to a combination of higher energy costs as well as depreciating currencies against the U.S. dollar, which has increased the cost of imports. Japan's rate of selling price inflation also remains elevated by historical standards. In sharp contrast, prices continued to largely stagnate in mainland China.

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Markets generally reacted positively to the PMI data for November, as the combination of cooling price pressures and accelerating economic decline signaled by the PMIs should translate into less aggressive interest rate hikes in both the U.S. and Europe, which should take pressures off other central banks around the world, where policy rates have raised alongside the U.S. federal funds rate.

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Purchasing Managers' Index data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are 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 are 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.