The Decisive | Season 7 | Ep.6 - PMI in Focus: Strong Output, Weak Confidence

View Full Transcript

Kristen Hallam:

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making.

 

Paul Smith:

Hello, and a warm welcome to the latest episode of The Decisive Podcast. I'm Paul Smith, an economist with S&P Global Market Intelligence, and I'm here today to discuss some of the latest trends in our Purchasing Managers' Indices. To help me do that, I'm joined by 2 fellow economists on our team. First up, we have our usual guest, Andrew Harker.

 

Andrew Harker:

Hi, Paul. Nice to be back after the summer break. I'm not missing my holiday at all, honest. Now, I think it'd be good today to catch up on what information our surveys can provide on the Middle East region, and also highlight our construction PMI surveys.

 

Paul Smith:

Thank you, Andrew. Yep, summer holidays do seem a little bit of a distant memory, don't they, at the moment? But yeah, we're looking forward to getting into some of those topics. And also joining us today, first time in a couple of years, we have Tim Moore.

 

Tim Moore:

Hi, Paul. Hi, Andrew. Thanks for having me. Great to join you. Yeah, it's exactly 2 years actually since I was last here. We were talking about geopolitical uncertainty and a new UK Prime Minister. So much of the same. But yeah, looking forward to talking about the global economy more broadly today and some of the Middle Eastern surveys, in particular in Saudi.

 

Paul Smith:

Lots has changed, but not much has changed by the sounds of it there. I think before we get onto some of those topics, I think maybe it's a good idea, and I think we've been doing this in our recent PMI-based podcasts, is maybe a little bit of a scene set and think of where we are in terms of the global business cycle at the moment. And I think the broad theme of this year so far has been, at least on the surface anyway, has been one of maybe surprising resilience, a time of continued headwinds for the global economy. We've had the crisis in the Middle East, trade conflicts, the rapid expansion of CapEx related to artificial intelligence. They've all had disruptive effects on supply chains, prices, and economic activity. And I think as we record this podcast in mid-September, concerns remain, right? Oil once again trading north of $100 a barrel. There's growing continued worries about food prices in the months ahead following an exceptionally hot and dry summer across the Northern Hemisphere. And we've got lots of expectations now of a potential super El Niño event, which is likely to add further pressure on agricultural production around the globe.

And at the same time, definitely in recent weeks, we've seen bond markets become very unsettled by concerns over inflation, geopolitics, fiscal sustainability. And we've got sovereign yields in a number of countries now trading at multi-decade highs. And yet, despite all of these challenges, economic growth has held up remarkably well. Our JPMorgan Global Composite PMI in August rose to a 27-month high at 53.5, that was up from 52.7 in July. Remember, in the PMI world, anything above 50 is seen as growth. The further from 50 we are, the stronger that rate of growth.

And then if we look within that headline number at the country level, growth, strongest level in more than 4 years in the US. Eurozone recording some of its best readings in the past 3 years. Japan, very resilient. China growing more strongly than recently and at a trend rate. Basically, wherever we look, I seem to be finding surprisingly positive economic growth outcomes.

 

Tim Moore:

Yeah, that's right, Paul. You can see, as you say, 53.5, that's a really positive number on the global composite PMI. That's the economy moving up a gear, but we can still see businesses having one foot firmly on the brake. With that PMI data accelerating, we're looking at around about 3% annual GDP growth on a worldwide basis. And then, yeah, taking a look by sector too, things are a little bit uneven. We can see the PMI survey showing manufacturing still expanding solidly. That's supported by tech hardware, machinery demand, data center rollouts. And let's not forget, safety stock-building has meant a boost from inventories too across the summer.

But I think the big gain at the moment, if you look at momentum, that's coming from services. Service sector growth has accelerated for a 5th successive month. That's the highest reading since December 2024, so nearly 2 years ago now. We're looking at financial services and tech being the best performers. There's also a revival in spending on consumer services. Why are these sectors flourishing? Some of it is AI investment spending and CapEx, but we're also seeing private sector employment starting to stabilize a little, and that's helping fortify consumer spending in some areas. Let's not forget too, these sectors are also benefiting from accommodative financial conditions and lower business uncertainty relative to the second quarter. However, output expectations are still really unusually weak for an economy growing at this speed.

It's about the biggest gap between confidence and output, so output running stronger than confidence by the greatest extent since about 2019. And that was also a period of geopolitical uncertainty too. The levels of confidence we're looking at are normally consistent with a flat economy and not a solidly growing one and an accelerating one. So yeah, if you look at the worries conveyed to us from the PMI survey respondents, the most prominent are rising inflation and supply chain disruptions, both of which of course link to the Middle East conflict. And also playing into that lackluster confidence is the prospect of tighter financial conditions in major developed markets. So those headline numbers, the really strong headline growth numbers, are coming with a caveat of relatively weak confidence going forward.

 

Andrew Harker:

Yeah, that's really interesting, Tim. Lots to unpack there, isn't there? I just wanted to jump back to something Paul said at the start of the episode about some of the parts of the world where that resilience has been evident. I think the Middle East falls into that category as well. If you look at the August data, then we've got output growth in economies such as the UAE and Saudi Arabia that's the best since January, February time. So just before the outbreak of war in the region. Similar growth in Kuwait, which had been particularly impacted by the need to close their airspace earlier in the year. So positive news there as well. More widely, sort of business confidence is up in the region.

Tim mentioned some subdued confidence at the global level, but in the Middle East region, confidence is coming back to where it was earlier in the year. And also we're seeing delivery times improve, with companies increasingly reporting actually that they're looking to use local suppliers in order to secure items more quickly. And I just thought it would be good actually to highlight the breadth of our survey coverage in the Middle East region. So we've got a number of surveys there that we run on a monthly basis alongside the economies I've already mentioned. We also cover Qatar and Lebanon, and actually the size of the UAE panel we've got is such that we're able to produce Dubai-specific indices as well. So we've got real good coverage there. In terms of the sectors we monitor, people, I guess, probably more familiar with our standard manufacturing or services PMI surveys. But in the Middle East, we produce what we refer to as non-oil whole economy PMI surveys.

So these cover a wider range of sectors than the standard manufacturing or services PMIs. So we include sectors like construction, wholesale and retail as well. But as you can tell from the name, we don't include the oil sector. And this is because we typically survey private sector companies with our surveys, and the oil sector tends to be dominated by a small number of state-owned enterprises that would be tricky really for us to survey reliably. So we focus our efforts on the rest of the private sector.

 

Tim Moore:

Yeah, it's great to be building out our coverage in the Middle East region. There's a huge appetite for PMI survey data. And yeah, against that backdrop, earlier this year we announced a collaboration between S&P Global and alrajhi capital to produce the alrajhi capital Saudi Construction Index. So the goal with this monthly survey is to provide policymakers and market participants with a reliable tool to monitor changes in business conditions and really better assess the direction of the construction sector. It's the first S&P-developed construction index in the Middle East and covers the largest construction market in the region. Our headline index is a weighted average of 3 subsectors, so that's residential, non-residential structures and infrastructure activity. If you're thinking about what does the non-residential structures index cover, so that's office, commercial, institutional, and industrial. So covering a lot of those large public-private partnerships.

And then associated with that, if you look on the infrastructure side, that's dominated by transportation and energy projects. So the full spectrum of activity in the Saudi construction sector. And when you look at August survey data, you can see a robust upturn in total construction activity. This kind of consolidated a swift recovery in business operations in each month since April's brief downturn. And most importantly, the new order books data showed rapid gains in August, fueled by new residential and infrastructure work. Against this backdrop, input buying, rather, has expanded at the fastest pace since the survey began back in January. So we're looking at a Saudi construction sector that's clearly back on solid ground. Supply chains are also showing a great deal of resilience despite challenges from higher input costs, with delivery times for construction products and materials shortening again in August.

And then looking ahead, we can see from the survey there's upbeat growth projections in all subsectors, particularly housing and infrastructure in the next 3 months. So again, a signal that those large-scale public investment spending is translating into faster growth across the broader construction sector.

 

Andrew Harker:

Yeah, it's great to have that alrajhi capital Construction Index up and running, adding to our construction coverage around the world, because up until now, really, our construction-specific surveys have been primarily European-based. So we have surveys in Germany, France, Italy, and Ireland, enabling us to calculate a Eurozone construction PMI aggregate. Plus, we've also got a survey in the UK. Now, for our construction PMIs, we cover a lot of the standard PMI variables, but as Tim was mentioning there, we've got some specific ones for construction as well. So those breakdowns of activity by different types of construction that Tim was referring to, plus we've got information on subcontractors. And in our Ireland survey, which is sponsored by AIB, we even ask about selling prices. And the data for that actually tracks really nicely against official house price index data. Now, these surveys have been going for a long time now, really. In fact, the UK survey started all the way back in 1997, so it's nearing its 30th birthday.

 

Tim Moore:

Yep, the longest running survey, the UK construction one, and also the largest construction market in Europe. But when you look at the actual PMI data there, I'd describe it as a bit of a look away quick kind of a number. In recent months, we've seen cutbacks to housebuilding, which is aligned with what you've seen in the messaging from volume housebuilders about delayed decision-making and a lack of new project starts, and equally a lack of new infrastructure work to replace completed projects. So aside from some pockets like energy transmission infrastructure, other areas of the civil side have been really quite subdued over the summer. Elsewhere, some signs of stability in August, particularly commercial work. Data centers are a small but important factor, but really what's been trailing behind has been on the residential side. Things have really looked subdued throughout this summer, with the August fall similarly steep to what we'd seen in the first half of the year, with decision-making being put on hold and some nervousness perhaps around the outlook for borrowing costs. As for September and beyond, we're economists here, we're always looking out for green shoots of recovery.

There's plenty on my lawn after all this rain, but I'm not sure we can use that as much of a signal for the housing market outlook, Paul.

 

Paul Smith:

I think that's a fair analogy, Tim. Look, if we take some green shoots as a little bit of a synonym for what we've used today, which is that word resilience, then there are pockets of resilience in the UK housing market at the moment. And I think as most people would recognize, housing markets around the world, and the UK's no exception here, tends to be made up of lots of regional local markets. Markets where activity, prices, are generally determined by local conditions. So if I look at the current data, then places like Northern Ireland, Scotland, areas in Northern England, demand, prices fairly resilient. But look, if I take that bird's eye kind of macro view, then unfortunately I think probably like your lawn, Tim, at the moment there's plenty of bare patches still. And again, probably like in the UK at the moment, they tend to be found in southern England, right? And we had the bulk of that hot weather was concentrated in the south of England, and that's where activity and prices tend to be most subdued in terms of the housing markets at the moment. So look, I'm probably not too surprised when you're referencing there some weakness in UK residential housebuilding overall, because it just fits into that broader narrative, right, at the moment, of a broader slowdown across the housing market in recent months.

And that's several reasons, some of them we've already referenced, right? Geopolitical uncertainty is a major factor, but then we're layering on top of that ongoing worries over domestic taxation, which, look, it seems to be an annual event in the UK at the moment where buyers and sellers around this time of year start to hear speculation and concerns around changes in property tax or capital gains taxes regulation in that end-of-year upcoming government budget that we have in the UK. And then we have borrowing mortgage costs very volatile at the moment. For many buyers, the cost of servicing mortgage debt is of course a lot higher than it was a few years ago, which, look, that is a meaningful constraint on demand and affordability, but also the pricing of their mortgages, they're changing on what feels like a daily basis at the moment. Again, linked to what we've mentioned earlier in the podcast, disruption in kind of sovereign debt markets. So that combination of uncertainty, global, domestic, higher and less predictable borrowing costs, that's crystallizing in other housing indicators that we produce at S&P. For me, that's most notably the Lloyds House Price Index, which recorded its first annual fall in prices since late 2023 in August, although only marginal at 0.4%, and really carrying on a pattern this year where prices have been broadly flat throughout the year to date. They're just moving in a relatively narrow range, not breaking decisively out in either direction.

So that weakness that we're seeing in housebuilding and then kind of prices as well, just part of a wider pattern here. Cautious buyers, higher financing costs, and an uncertain economic and political backdrop, all tending to weigh in those sectors, I think, which are perhaps a little bit more exposed to the types of developments.

 

Andrew Harker:

Yeah, it feels like we've come full circle here over the course of the past 15 or 20 minutes, doesn't it, Paul? Coming back to some of the themes you mentioned at the start of the episode there with that uncertainty about international conditions and what's going to happen with interest rates. You can see how the global picture is still impacting specific economies and sectors in different ways, despite that sort of overall resilience that you were talking about that we've seen globally. So yeah, certainly a lot to look at in the global economy at the moment, and not a straightforward picture by any means.

 

Paul Smith:

No, it is important to look below the surface of those headline numbers. And I think that brings us, as you said, Andrew, brings us all the way back to complete the circle, if you like, on today's kind of topics and maybe a natural place for us to end on today. So a big thank you to you, Andrew, and of course, Tim, for your valuable contributions. Thank you for listening to this episode and please do listen to our other episodes of the Decisive Podcast that are available on our website. And of course, please do follow latest PMI updates on the website and through our usual media channels. Bye for now.

 

Kristin Hallam:

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.