The Decisive | Season 6 | Ep.6 - PMI in Focus: Stockpiling and the Shadow of Stagflation

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Paul Smith:

Hello, welcome to the latest episode of the Decisive Podcast. I'm Paul Smith, an economist with S & P Global Market Intelligence. And today I'll be guiding you through recent developments in our closely watched Purchasing Managers indices. And joining me on our voyage today are two fellow economists from our team. So firstly, it's a good afternoon to Eleanor Dennison.

 

Eleanor Dennison:

Hi, Paul. Yes, it's been a while since my debut on the podcast, so thanks for having me back. I'll be providing the overview of the current scenario in the eurozone and how the picture has developed in the past two months since we've had PMI data since the outbreak of war in the Middle East.

 

Paul Smith:

Excellent. Thanks, Ellie. And secondly, we also have our regular contributor, Andrew Harker.

 

Andrew Harker:

Hello, Paul. Yeah, following on from what Ellie said, there feels like there's only one story in town really at the moment in terms of the global economy. We're really lucky with the PMIs. We've got so many different data sets that can help us understand the impacts of what's happening in the Middle East. So really looking forward to delving into those over the course of the episode today.

 

Paul Smith:

Absolutely. And I think that's the place to start. Right? You know, back in March, when we were last on the podcast, I think we highlighted several concerns related to the conflict in the Middle East and its potential impact on the global economy. Particularly at the time, you know, I can, if we remember, if we go back to March, we didn't actually have any PMI data that had really caught any of that impact at that point in time. We were kind of concerned there, weren't we, about the potential upside risks to inflation and product shortages caused really by the significant disruptions to energy production and supply. And I think we identified several areas where the PMI data could help us track those impacts. And so I think today's episode, our kind of main goal here is to revisit some of those key indicators and maybe assess how the effects of the conflict are playing out from the perspective of the, of the global economy, you know, and with some, you know, references, kind of, you know, you both, in particular, Ellie, there kind of referenced some kind of fairly broad regions to look at.

So I think as well, back in March, we noted that the influence of the conflict on the global economy would be closely linked to how long that conflict lasted for. So, yeah, as we speak today, the situation still remains fairly fluid and changes daily, particularly with a lack of resolution around that vital kind of Strait of Hormuz, that critical waterway for, for global shipping. And I do feel that's shown up very clearly in the two months of PMI data that we've been, that we've collected and released since that last podcast appearance. So I suggest the best way to attack this is to kick off our discussion with a bird's eye view, maybe by focusing on the JP Morgan Global Composite PMI, which in essence summarizes all 40 plus countries that we collect data for.

 

Andrew Harker:

Yeah, I can have a look at that for you, Paul. On the face of it, some positivity with the latest JP Morgan Global Composite PMI Business Activity Index came in at 51.8 in April. So above that 50 no change mark and signaling growth of business activity during the month. In fact, we actually saw slightly faster rises in both output and new orders than we had in March, while employment ticked higher as well. So on the face of it, some positivity there. Actually if you look at the data, it suggests that growth was below trend still and only modest overall, while inflationary pressures continued to build. Both input costs and output prices rose at the fastest rates since 2022. So that's been quite a key feature of the latest surveys.

 

Paul Smith:

Yeah, it's a great scene set, Andrew. And I think having set that kind of broad overview I think as we start to unpack that data, then we start to really find some kind of even more devil in the details if you like. So, and I think first of all, I think it's worth noting in April we had some notable differences in performance, which in kind of our manufacturing and service sector data. So for global manufacturing, output rose quite strongly, at least in the context of recent history anyway. In fact, growth actually climbed to its highest level since July 2021, which is nearly a five-year high there. And that was driven by a similarly strong rise in new order inflows. That's in contrast with the service sector. And I think just to clarify what I mean here, by the service sector, we're talking about private sector services, is that the other companies that we survey. So we're not talking about kind of government kind of public sector kind of spending here. You know, also to be clear, we also exclude kind of the retail and wholesale categories. So but, but nonetheless that covers a huge range of economic activity. So you know, we've got things like financial institutions like banks and insurance companies, hospitality, hotels and restaurants and, you know, business service providers, you know, such as marketing, advertising, software services, et cetera. So even without a couple of areas that we're not covering, that's a big overall contributor to economic output, probably the engine room if you like, for most major developed economies. And I think when we take all of our data and aggregate again at the global level, we found in, in April, service sector output rose only weakly overall and well below its typical rate. And the main kind of driver and culprit behind that was a weakness in new business inflows. You know, they rose at their weakest pace in two and a half years.

 

Eleanor Dennison:

Yeah. So if we come at it from a eurozone perspective, we've also seen this soft service sector performance activity nearly stalled in March and April actually saw the first contraction in almost a year and this was the fastest fall since February 2021. That's over five years. Also coinciding with a renewed fall in new business. Of particular note, we've seen noticeably weak performances in Germany and in France. And understandably our broad sector data showed that the consumer services segment is taking a hit, having registered a steep contraction. And this covers things like tourism and recreation, media and as you can imagine, these are sectors that are highly exposed to consumer sentiment, especially at a time of elevated geopolitical tension. Looking at financials, the sector recorded its first contraction of the year so far, but has shown relatively more resilience as the reduction here was only slight in nature.

But still, this was the weakest financial performance in both activity and new business in over two years. And I'd say one of the benefits of the PMI data is this additional color that we can glean from the anecdotal evidence from our panelists. Looking at our panel comments tracker data, which sums up this qualitative evidence in a quantitative way, showed that the mentions of uncertainty among eurozone service providers were an all-time high with this reading, more than seven times its long run average. And this series goes back to the start of 2005. Whereas eurozone manufacturing output actually increased at a stronger rate following the outbreak of war in the Middle East, signaling some of the fastest increases in production and order books in over four years. But as you mentioned, Paul, we can't take this boost to manufacturing output at face value. The picture that our sub-index data paints is that the sector is being buoyed by precautionary stockpiling attempts at firms. Given this disruption to supply chains and price pressures brought on by the war, we saw manufacturing purchasing quantities raised in March, ending more than a four and a half year trend of reduction, with the rate of expansion also picking up in April.

And although there were more mentions of safety stock building than normal, stocks of purchases are yet to have actually risen as delivery wait times are longer. So much so April actually saw the strongest decline in supplier performance in nearly four years. And the impact of this building of safety stocks will likely exacerbate the already challenging cost environment that firms are facing, in turn causing demand destruction when this temporary front loading of activity inevitably fades.

 

Andrew Harker:

Yeah, that's really interesting and I'd like to dig into some of the details of those rises in manufacturing input costs you mentioned. I think that's probably been the most noticeable impact of the war in the Middle East so far. Go back to the global level. Manufacturing input costs rose at the sharpest rate since mid-2022 in April. But actually it's the steep acceleration in cost inflation over the past two months, which is extremely stark. We take that sort of two-month movement in the index. The global manufacturing level is the largest we've seen since January 2010, and that measures actually at a record high in a number of economies, including the eurozone, UK, Japan, Australia.

If you take developed markets as a whole, it's actually the second highest we've ever seen behind only the aftermath of Hurricane Katrina back in 2005. As you mentioned, we're quite sort of aware of what's driving this. There's all the issues around the Strait of Hormuz and the war in the Middle East. But it's really good that we can see with our data the anecdotal evidence you mentioned there can help us really dig into the reasons driving these trends. So at the global level, firms that say prices are higher because of rising energy costs are running about three and a half times average in April. And those saying that prices are higher because of shipping costs, nearly 10 times the average. So they see two real key drivers there of higher prices.

There's also another sort of data set that I'd like to speak about today and that's price pressures and supply shortages indicators. These cover around 20 different commodities and they're used to when companies give us specific mentions of either price increases or supply shortages of those items. Now looking on the price side, two of those hit record highs in April and those were oil and transport. So mentions of those things never been higher since we've been doing the surveys. And the trouble is, almost everything uses transportation or energy at some stage, whether it's a good or a service. Those things always come into the mix as inputs. And so they're real key inputs in all products. And you can see how inflation can really become embedded in supply chains.

I think you look at the data, the pressure on prices are limited to those sort of oil, transportation, energy areas. We're also pushing records in things like chemicals, polymers and aluminum as well in terms of mentions of those being up in price. These are other commodities which have oil as a key component or perhaps that the share of their either production or exports coming out of the Middle East is relatively high. So I think it's worth keeping an eye on these indices of different commodities as we go forward and see how inflationary pressures potentially widen out in the future. So that's the cost side of things. But then we can also look to see what extent these costs are being passed through to customers. I like to look at Asia when we're talking about manufacturing, because we have such a wide number of manufacturing surveys in Asia, so it really helps us to dig into the details.

And also it's a continent, a region that's particularly exposed to the issues in the Middle East due to the amount of energy that is sourced from there. Now, looking at the selling price information we have in Asia, there's a bit of nuance there. Some of the larger economies, such as mainland China and India, seeing relatively muted selling price inflation in April. But on the other hand, a number of economies are seeing inflation at or near record highs. Those include South Korea, Taiwan, Indonesia, Vietnam, Malaysia. And so there's definitely some pass-through in the system there. There's probably more to come on that as well because firms don't always pass through these higher costs immediately. They might have longer term contracts that they need to wait to renew or revise at later date.

And also, companies will be looking to potentially limit the impact on demand of price rises, so might look to absorb some of the costs that they see themselves. So again, that's definitely data to watch out for in terms of how quickly these costs are going to feed through to the wider economy in the months ahead.

 

Eleanor Dennison:

Just to give a quick view on what's happening on the services side, we've seen firms certainly facing elevated cost pressures. The global reading here for cost inflation was at its highest in exactly three years in April. And although this reading was above its long run average, as you've outlined, Andrew, manufacturers are definitely bearing this brunt of cost pressures at present as they face what US economists like to call the first round of inflationary effects. Part of this is just due to the nature of the sector. Manufacturers are more energy intensive. While we know that one of the key drivers of services inflation is hinged on wages which appears as more of a secondary effect and we've seen this in our panel comments tracker data that wage inflation is yet to have fed through fully. There were more mentions of higher energy, shipping and raw material prices than normal. But mentions of salary costs as a driver were broadly in line with the average trend.

 

Paul Smith:

Yeah, I feel on wages as you kind of hinted at there, Ellie, we do feel we're a little bit way off seeing a huge impact on wages just because of some of them lags you kind of mention there that tend to be inherent don't in kind of wage setting between employees and firms. But I think as well, at least in a, I'm probably coming from a European perspective here, you know, workers don't quite have the same bargaining power they did maybe during the, I guess, you know, 2022 for instance when we have the kind of the energy price shock from the Ukraine war and we were still of course somewhat emerging from COVID with labor shortages and, and all sorts of other pent up demand being released at the time. And that, that leads me to think that you know, second round effects, building on your first round effects, you know, phrases that kind of us economists are very fond of, could be quite muted maybe. But again, it really depends on how long and whether any resolution can be found, you know, in them challenges in the Middle East. But I think it's fair to say you're definitely feeling the overall inflation mood is becoming more hawkish. Regardless of what happens now, it's clear that it will take months, not weeks to get supply chain, shipping routes, transit corridors, et cetera back to normal. And then I think you start to feel the risks of stagflation rising. If you look at our services data from the PMI surveys, you know, we've already mentioned we're seeing rising inflation of course, but falling output in some countries as consumers and business already start pulling back on spending.

That hesitation is driven by several factors of course, you know, and we, we've covered a lot of course already. The big one is rising energy and food prices and just the overall cost of living, right? Then you've kind of got disruptions to travel, product shortages, supply delays. Yeah, even if some of them issues are more prominent in manufacturing and then in services. And thirdly, and I think this is, this is hugely important and significant as well in this type of environment, there's just an overall level of uncertainty and loss of confidence caused by you know, these kind of ongoing global conflicts. And that all leads to a retrenchment, right, in market demand. People become more cautious. They wait to see how the conflicts unfolds and how inflation evolves.

So that slowdown is a natural response, I think, to that uncertain outlook. And that's definitely a common theme I think we've seen across our panels in April, for example, in the U.S. inflation and uncertainty, limited service sector growth, and then coming all the way back to the eurozone, especially countries like France, Germany, Spain, you know, that gap between manufacturing and service performance was quite noticeable, as Ellie noted earlier. And those facts, inflation, uncertainty, were key in explaining why activity and sales were lower though, in those countries compared to March.

 

Andrew Harker:

Yeah, just to jump in on the uncertainty side of things there, Paul, I think Ellie had a really good stat earlier in the episode where she talked about the uncertainty comment tracker for the eurozone being really high. I’ll just comment on the global one as well, actually. Yeah. So mentions of uncertainty amongst our global companies. So all the companies we cover around the world running just over five and a half times the average in April. It was actually equal with what we saw in April 2025 when the US announced the range of tariffs on different economies around the world. It was actually only a fraction below the record high from March 2020, right at the start of the COVID-19 pandemic. So you can really get the sense of how sort of uncertainty is quite elevated at the moment among the global business community.

 

Paul Smith:

Yeah, I feel, I feel, Andrew, with all these statistics brought to us today, I think, you know, you're angling a bit for a return to the old statistic of the month, which is something that we used to do a lot in the early days.

 

Andrew Harker:

I think Ellie's quite keen on it as well.

 

Paul Smith:

Yeah, I'm sure you are. But I think the challenge, right, this month is just actually finding out which one was the most prominent. But there's so, so many, but I think, you know, regarding uncertainty, you know, current circumstances are also challenging for us as economists. Right. You know, and especially I kind of look out to those, you know, you know, people working in central banks and economic policy. And in general. Now, look, I don't expect a huge amount of sympathy for us economists, you know, but we do, you know, it is challenging when, I think when you face divergent economic trends, it leads to difficulties. Right? For us, but also for clients in interpreting where we are in terms of economic performance.

And I think that's where, you know, the current information flow is a great example of how we can use the data, both quantitative and qualitative, you know, to help navigate through, through some of those difficulties. Right? You know, I think on the surface we're seeing some reasonable industrial growth, but we know that's driven by stockpiling. So present outcomes in those statistics are not necessarily representative of an economy's underlying performance. You know, effectively today's boost to economic activity will become tomorrow's noticeable drag. Right?

So, and I'm, I'm kind of trying to keep them thoughts firmly in my own mind, you know, when you're working through things like short term GDP forecast particularly the area that I'm interested in is the eurozone, you know, those divergences in trends in the economic data causing some notable divergence in even statistically driven models designed to predict and track GDP growth. And I won't go too much into the details of the models and I know that's not always something that Andrew particularly enjoys. He's kind of, yeah, I guess for those listeners, obviously you can't see us, but Andrew's kind of laughing away at that. But I genuinely do think being able to contextualize those statistics with the help of PMI data can really help us pick the right tool for the job, so to speak, and again help clients guide them through the statistical fog that we're currently facing. So, you know, for me personally, I'm inclined to put much more weight on those models that make greater use and influenced by timely, very reliable survey data. They've got a great track record in these situations and they tend to be crucial for shaping our forecasts, especially around those turning points in the economy. Incidentally, and rather worryingly, using those survey driven estimates means the chances of a contraction in eurozone GDP in the second quarter seem to be rising every week in line with that downbeat news flow, and with that of course inevitably increasing probability of outright eurozone recession in 2026.

Which is a rather somber note to end on, isn't it today, sadly. But I think we've covered some good ground there and provided some insights into some of the key drivers at the moment in the global economy. Some of those I think we expected back in March, while others by that stockpiling in industry a little bit more nuanced I think, and maybe not so easy to spot, you know, just a couple of months ago. But yeah, there's other areas that we could have touched upon today, you know, beyond that Middle East crisis. You know, for example, tariffs remain on many of our panelists' minds, especially those with close trade links to the US like Canada. And we also continue to see references to shortages, price hikes in IT equipment, you know, things like memory, hard drive, semiconductors, et cetera. And that's probably linked to the growth in investment in artificial intelligence and the underlying structural changes, right, in that these are bringing to our economies, to how we work, et cetera. But, you know, perhaps, perhaps these are topics we could explore in greater detail in it in a later episode.

But for now, I think we'll leave it there. A big thank you to Ellie and Andrew for your valuable contributions today and thank you all for listening, and we look forward to being back on the Decisive podcast later in 2026.