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PMI in Manufacturing – up to 48.7 – reflects backward looking reaction to easing contraction in May

 
02.07.2015

The headline PMI in manufacturing edged higher to 48.7 in June, from 47.6 a month earlier. Output in investment and intermediate goods declined, offset by an increase in consumer goods manufacturing. Producers continue to shed jobs, while new orders are still stagnating. Cost inflation has settled on a declining path, as input and output prices rose only marginally with weak demand putting a lid on the potential for price increases.

With the headline number outperforming the Bloomberg consensus of 48 and getting closer to the neutral level of 50 against a backdrop of contracting FAI, anaemic wage growth and tight credit conditions, it is worth asking whether the increase is sustainable and, indeed, if it is indicative of the underlying processes.

On the one hand, the dynamics in consumer goods (a source of the PMI improvement) is in line with the recently improved data on real retail sales. However, we think that as an indicator of the sequential growth in economic activity, the PMI in manufacturing has a significant backward looking component, meaning that the current uptick might be a reaction to the easing contractionary momentum in May. Thus, despite the rise in the headline figure, the overall report brings more evidence of underlying weakness in the economy and shows no signs of the green shoots of an investment-led recovery. Nor does it indicate that the adjustment on the labour market has run its course.

Alexander Isakov, Petr Grishin
VTB Capital analysts

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