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The seven per cent swan dive by the Nikkei got most of the attention Thursday but for Canadian investors, the weak manufacturing data from China – as a sign of global growth and commodity demand – is far more important. With China's manufacturing activity officially in decline, we looked at all of the world's largest economies to assess global economic activity. The view is not encouraging.
One of the easiest ways to follow changes in global manufacturing is JP Morgan's index of Global Purchasing Managers surveys (see chart). The index has a decent correlation with global metals prices, with an R of 0.74 and R-squared of 0.55. (Oil prices are affected by regional dynamics and the fit with the global economy is there, but not as tight.)
The purchasing managers index has been tending generally lower since February 2011, indicating that the economic backdrop for global manufacturers has been deteriorating, albeit gradually.
Industrial Production growth for the world's largest economies by GDP shows just how miserable the global economy has become for a big percentage of the world. Italy, Germany, Japan, France and the U.K. continue to show negative year over year production growth. The United States is barely positive and China, despite the recent data, is the only country of the world's seven largest economy where manufacturing activity is comfortably in positive territory.
The overall picture is not quite as bad as it seems. The next three largest national economies – Russia, India and Canada – have increased production by an average of 2.0 per cent. Still, it's clear that the economic environment for global manufacturing, and by extension for global commodity demand, is very soft. Combine this with the growing production capacity of global miners, and the outlook for metals prices and mining stocks will remain less than bright, until activity finally recovers.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
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Scott Barlow