Key economic indicators reveal that a showdown has begun following disappointing numbers about manufacturing activity and industrial production from leading world economies.
Clear declines reported by the U.S., Germany and China within a week of one another signal what analysts call a spring slowdown. But unlike previous years, this slowdown introduces U.S. sequestration and deepening German weakness to the trend, and they could heighten the impact beyond spring.
US Manufacturing Is Not As Strong As Some Say
Markit Economics' early estimate of how the U.S. manufacturing sector will perform during April indicates a sharp change downward from March at 52.0, far below both April's 53.8 forecast and March's 54.9 actual (the 50 level separates growth from contraction). Meanwhile, the U.S. Commerce Department released figures Wednesday on durable goods orders in March, which showed a sharp drop at 5.7 percent under orders in February. Orders for metals, machinery and electrical equipment all fell during an early stage of activity that awaits the unpredictable effect of the sequester.
Germany's Manufacturing Is Underperforming
Markit's early estimates of German manufacturing show that the activity is worsening as its 47.9 index level marks a third consecutive month of slipping further down. A weakening Germany contributed to the entire bloc remaining stagnant in negative territory on Markit's euro zone Flash Manufacturing PMI, at 46.5.
"Previously, we've seen Germany expand while other countries have contracted -- notably Spain, Italy and France," Markit's chief economist, Chris Williamson, said. "Now it seems those contractions are being accompanied by a downturn in the largest economy, Germany, and that will no doubt act as a drag on growth."
If China Catches A Cold ...
Trade data show that Chinese imports of commodities, industrial metals in particular, have been falling in recent months, David Rees, emerging markets economist with Capital Economics, said. "That is bad news for those emerging markets in Latin America, the Middle East and Africa that predominately export commodities to China."
Yet even countries such as Colombia and Mexico that do very little direct trade with China will still be hit indirectly as concerns about Chinese demand have contributed to a decline in global commodity prices.
HSBC's Flash Manufacturing PMI estimates that China's production and orders will take a significant hit in April, leaving this index barely above just half a percentage point above breakeven at 50.5, considerably below the April forecast of 51.4, which was already below March's 51.7 level.
Meanwhile, BRIC economies are reaching the structural limits of their current economic models, according to Rees. "A slower pace of GDP growth will be the norm over the coming years. In turn, overall emerging market growth will be slower in the future than it has been during the past 10 years."
Another Key Player Worries
Analysts are also watching South Korea, whose economy has been weak for more than a year and whose GDP (currently $1.611 trillion) grew at a pace below trend in each of the past seven quarters, according to Capital Economics' John Higgins. Higgins said recent data suggest that a stronger manufacturing pickup for Korea will be unlikely in the near future. "Although the manufacturing PMIs have improved since the start of the year, data for retail sales, manufacturing output and industrial production have all been very weak," Higgins said.