By G C Mays
The recent release of Purchasing Manager Index reports for May paint a mixed picture of economic strength & weakness around the globe.
Asia
Manufacturing activity in Asia varies greatly by country with India showing strong growth while Australia shows a marked decline in activity. Earlier this week Australia reported quarter over quarter and annual GDP growth of 1.3 and 4.3 percent, respectively. It does not seem that this sort of GDP growth is in line with PMI manufacturing and service sector indexes of 42.4 and 43.5, respectively. In the US a PMI index in excess of 42.6 over time, is on average consistent with expansion of the overall economy. While I would not expect correlations in Australia to match those in the US precisely, similarities should exist as survey collection and processing methods are pretty standard. That said, in my opinion Australia will revise to the downside the country's most recent GDP figures.
In contrast to the Australian PMI data, India's economy is the strongest in Asia with new orders, production, order backlogs, employment as well as raw material and selling prices growing. Prices that have risen persistently has caused inflation to rise to about 7.2 percent. This has largely offset that potentially capital attracting 8 percent interest rate and is one of the primary reasons for the weakening of the rupee.
This is also one of the reasons for the deadlocked negotiations between Canpotex, the potash marketing arm for Mosaic (MOS), Potash Corp (POT) and Agrium (AGU), and India. Since June 11, 2007 the value of the rupee has plummeted about 30% against the Canadian Loonie. This makes fertilizer prohibitively more expensive for the country to import.
The rupee has also declined 27 percent against the US dollar. This affects its price negotiations for phosphate with PhosChem, a U.S. Exporter also owned by Mosaic and Potash Corp. On June 7th two unnamed Indian customers finalized a deal that will supply them with 2 million tons of Phosphate each year for three years at prices that get renegotiated annually. This will allow the buyers to take advantage of any strengthening of the rupee against the dollar over the next 3 years.
North America & Europe
North America has the strongest economies in the world with new orders, production and employment still growing in the US, Canada, and Mexico. Order backlogs are also growing except in Mexico where they seem to have some excess production capacity that is causing them to cut their order backlogs.
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Source: The Mays Report
The US manufacturing sector is now in its 34th month of expansion and growth has begun to slow. Back in October of 2011 when I penned, "Global Recession: Who Will Become Gravely Ill And Who Will Catch The Sniffles" I wrote,
"The euro zone will most likely show negative GDP growth in the 4th quarter of this year and despite its current resiliency, the U.S. will probably succumb to a negative quarter or two in the first or second quarter of 2012. "
Although we will not begin to measure 2nd quarter GDP until July my forecast of a contraction in the US during Q1 or Q2 of 2012 has become unlikely. However, with employment growth now beginning to slow we could see a mild contraction later this year. As for Europe, it is already clear that recession is upon them as both the Euro zone and European union reported that GDP contracted by -0.3% in the 4th quarter of 2011 and growth was 0.0% in the 1st quarter of 2012.
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Source: The Mays Report
All across these select European countries new orders, production, order backlogs, and employment is contracting while firms in most of these countries deal with increasing raw materials costs. Manufacturers in Spain, Italy and Greece are unable to pass these higher costs on. In fact, they have reduced selling prices to stay competitive, further reducing profitability. Most countries cite falling exports as a key driver of falling new orders. Ireland is a sole exception to this trend as they were able to secure new export orders outside of the euro zone.
Emerging Europe
In emerging Europe manufacturing activity is not as strong as it was back in October as Turkey and Russia teeter on the edge between growth and contraction while things have deteriorated in the Czech Republic and Poland.
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Source: The Mays Report
In all four countries order backlogs are declining, however they are falling fastest in the Czech Republic and Poland, the two countries with PMI indexes under 50, which divides economic growth from contraction. Russia has the strongest economy of the group. Unlike the others, it is experiencing new order growth that is accelerating.
Europe will continue to dampen global growth for the foreseeable future and have an adverse impact on many emerging market and advanced economies that have become increasingly dependent on exports as weak internal demand slows their respective domestic economies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
