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Manufacturing bottom points to modest recovery in global growth in 2020


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Manufacturing bottom points to modest recovery in global growth in 2020

The worst may be over for global manufacturing.

Manufacturing has been at the heart of a slump in 2019 that the International Monetary Fund expects will have seen global growth slow to 3% — the weakest since 2008/09 — as trade disputes, weak productivity and Brexit sucked demand out of the economy.

A dramatic decline in output from the world's factories has dragged industrial giant economies such as Germany to the brink of recession, while Japan and South Korea have also recently had negative quarters. But some recent data has been good enough to encourage economists that the worst, if not yet over, is almost behind us.

"The manufacturing recession seems to be ending, a clear positive for global growth," said Robin Brooks, chief economist at the Institute of International Finance, or IIF.

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In China, the traditional engine room of the world economy, the manufacturing Caixin PMI nudged up to 51.8 in November from 51.7 in October. Profits in the industrial sector grew 5.4% year on year in November having contracted by 9.9% in October.

Manufacturing hit a seven-month high in India of 52.7 while even in Germany, which has been among the biggest victims of the downturn in global manufacturing, PMI rose for a second consecutive month in November to a five-month high, though remained deep in contraction territory at 44.1.

Weak manufacturing data has been exacerbated by an "inventory overhang that needed to be worked down" and the uptick in new orders suggests that this overhang is now being worked through, and that the data suggests the trade war has not overly disrupted supply chains, according to the IIF.

"There are now mounting indications that the inventory correction has run its course," Brooks said.

The U.S. ISM Manufacturing PMI reading for November was 48.1, slightly lower than October (48.3) but up on the low point in September (47.8). But a 1.7 point uptick of new orders in November was the sharpest rise since May and suggests the manufacturing sector is turning the corner. While preliminary data for December disappointed economists — the flash estimate of 47.2 was well below the consensus expectation of 49.0 — but the data point often sees significant revisions in later prints.

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Slow growth to return

The uptick in new orders in key regions, and apparent easing of trade pressures, has boosted confidence that a recession will be avoided.

"We expect the slowdown in global growth to bottom out around the first quarter of next year and to then recover over the course of 2020," Neil Shearing, group chief economist at Capital Economics, wrote in a research note.

The improved outlook has been reflected in financial markets, with yields on sovereign debt rising as investors seek riskier assets. Yields on 10-year U.S. Treasurys climbed from a 2019 low of 1.52% on Oct. 4 to 1.92% as of Dec. 31, while in Europe, German bond yields, though still negative, have rebounded to -0.21% from a low of -0.75% in September.

Global trade has suffered in line with manufacturing as weakening Chinese demand and a raft of protectionist measures around the world limited activity in the world's ports. However, there have been some signs of recovery there too. The CPB world trade monitor suggested the volume of global trade increased by 0.4% in October, having declined by 1.2% in September.

Shearing expects trade to continue the upward trend, but warned that any recovery will be "extremely weak by past standards," and uneven with the euro area lagging the U.S., and China continuing to slow.

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This view is supported by Goldman Sachs, which expects easier financial conditions, and a reduction in trade uncertainty to boost economic activity. The bank's economics research division anticipates global growth to rise "modestly" to 3.4% of GDP in 2020 from 3.1% in 2019.

Risks remain

But the recovery is far from uniform and risks remain abundant. In Japan, weak demand from China continues to weigh on exports, leaving the manufacturing sector in contraction for the eighth consecutive month.

"Inventories of inputs also fell at a sharp rate, suggesting that firms are not expecting output requirements to rise anytime soon," said Joe Hayes, an economist at IHS Markit.

Much will depend on the outlook for trade, and on that front the picture remains mixed despite the U.S. and China being set to sign an agreement for the first phase of a trade deal on Jan. 15.

"The trade war isn’t ending, it’s merely shifting away from a narrow focus on tariffs and towards broader issues around technology, investment, industrial strategy and security," Shearing said.