Moneycontrol Pro Panorama | Ice, fire, ice?

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In July 2020, a few months after the pandemic started, we had wondered whether the post-pandemic world would see a deflationary bust caused by the disruption in economic activity, or an inflationary spiral caused by the massive fiscal and monetary stimulus. Would we see inflationary fires, or deflationary ice? The reference is to the Robert Frost poem, ‘Fire and Ice’, which begins, ‘Some say the world will end in fire/Some say in ice’.

Well, we’ve already had the pandemic bust and inflationary fires have raged across the globe. The fear this time is of recession in the advanced economies. In other words, after ice and fire, we may be in for some more ice.

That is what the Flash Purchasing Managers Indices (PMIs) for the current month are telling us. The Flash PMIs are advance indicators of the PMI levels for the month, based on 80-90 percent of the total PMI survey data and designed to provide a month-on-month indicator of the level of private sector activity. A reading below 50 indicates contraction from the previous month. And what the August 2022 Flash PMIs show is that the advanced economies of the Triad (the US, the Eurozone and Japan) are all contracting.

The Flash composite PMI (which measures both manufacturing and services activity) came in at 45 for the US. What’s more, the composite PMI was below 50 in July as well, which indicates the US private sector has been shrinking for two months now. It’s easy to understand where the recession fears are coming from.

The Flash Composite PMI for the Eurozone for August was at 49.2, and it was 49.9 in July, so that too signals the private sector in the Eurozone has been shrinking for two months running. Both Germany and France had composite PMIs below 50, signifying contraction. For Japan, the Flash August Composite PMI was 48.9, again pointing to contraction in activity from the previous month.

Among the other economies that have Flash PMIs, Australia had a Flash Composite PMI of 49.8, in contractionary territory, while the UK’s was at 50.9, marginally in expansion, but an 18-month low.

With economic activity decelerating, inflation pressures are being contained. The US Flash PMI press release says, “In line with the trend for cost burdens, firms increased their selling prices at the softest pace in 18 months in August.” For the Eurozone, the release said, “Input costs increased at the softest pace in close to a year while output charge inflation was the weakest in the year-to-date.” And in Japan, the increase in prices charged for goods and services softened to a four-month low.

This article points out that demand destruction in the developed economies, along with the weakness in the Chinese economy, has led to a sharp fall in commodity prices.

At the moment, the market is evenly split whether the Fed will hike 50 or 75 basis points at the next meeting on 21^st September. But that is still some way off and Jerome Powell’s speech at Jackson Hole this Friday is expected to throw more light on the Fed’s thinking. Given the economic environment seen in the Flash PMIs, Powell will have to tread a fine line, giving a message that financial conditions will continue to tighten while at the same time ensuring that the economy doesn’t tip into a recession.

Investing insights from our research team
Pidilite Industries: Strong competitive moat with overly stretched valuation

Garden Reach Shipbuilders: Firing on all cylinders

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Sebi’s settlement scheme is good but also raises troubling questions

Chart of the Day | China's steel output in the doldrums

Why we are clueless on how many rural households we have in India

ASEAN is critical to India’s geopolitical future

Turn in global oil markets may be shortlived (republished from the FT)

Bank Privatisation | Forget big bang, it’s unlikely there will be even a whimper

Privatisation of India’s public sector banks is like Waiting for Godot

 Technical Picks: Natural gas, Radico Khaitan, Coal India and TCS (These are published every trading day before markets open and can be read on the app).

Manas Chakravarty
Moneycontrol Pro