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  • We have changed our forecast for global PMI manufacturing and now look for a turn higher already in Q1 as many headwinds have eased. It suggests that a recession in H1 in the US and the euro zone is set to be mild and short. We have lifted our US GDP forecast to 0.3% for 2023 (-0.2%) and +0.9% for 2024 (0.5%).

  • The manufacturing recovery is also set to drive stronger demand for commodities and revive some inflationary forces. This is set to challenge the ECB and the Fed and reinforces our expectations that we will see no rate cuts from them in 2023.

Following a surge in activity in 2021, the global manufacturing sector faced many headwinds in 2022: a) sharp rise in commodity prices that pushed up inflation and eroded consumers purchasing power, b) a significant tightening of financial conditions, c) rising uncertainty from Russia’s aggression against Ukraine and d) a substantial slowdown of China’s economy driven by the country’s zero-covid policy. The drag on demand also led to inventory-build up with companies working to reduce inventories during the year.

However, going into 2023 many of the headwinds have eased and we now look for an earlier recovery of global manufacturing. First, commodity prices have moved lower and is set to push down inflation and lift real wage growth among households. Second, financial conditions have eased following a rally in both equity markets, declining credit spreads and lower bond yields. Third, China has left the zero-covid policy sooner and faster than expected, which we expect will unleash a strong increase in demand for consumer goods as well as private investments. Finally, we see some signs that the worst headwind from inventory adjustments will be easing soon.

At the same time many of our favourite leading indicators for global PMI have turned the corner reflecting some of the more positive factors above (see charts). Our “Growth tax” measure has moved from sharp contraction to decent tailwind. The short-term models in MacroScope leading indicators also point to a lift soon in global PMI. And in the euro zone, the German ZEW index has seen a decent rise over the past months. While some commentators tend to dismiss the ZEW indicator as it is a survey of financial analysts and not companies themselves, it has historically proven to send good signals of turning points in the manufacturing cycle.

After flagging upside risks to our global PMI outlook for a while, we now see enough evidence of a turn to revise our baseline scenario higher. We expect global PMI to bottom out in the coming months and continue a move higher during H1 and into the second half of 2023. In 2024, we look for the Chinese recovery to lose some steam again and for PMI’s to level off again.

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