The state of the economy can often dictate how much growth certain industries are experiencing which can influence their business decisions and modernization requirements.
Consequently, Ultra’s ERP consultant team takes a huge interest in world economic affairs, with special focus on the U.S. Manufacturing and Distribution Industry.
This July 2017 state of the economy update includes facts and figures captured from international markets, as well as details about events that have major sway over the economy.
July: The Month of International Trade Talks
Projected global growth rates for 2017–18, though higher than the 3.2 percent estimated for 2016, are below pre-crisis averages, especially for most advanced economies and for commodity-exporting emerging and developing economies.
Many face excess capacity as well as headwinds to potential growth from aging populations, weak investment, and slowly advancing productivity. While risks around the global growth forecast appear broadly balanced in the near term, they remain skewed to the downside over the medium term. On the upside, the cyclical rebound could be stronger and more sustained in Europe, where political risk has diminished.
On the downside, rich market valuations and very low volatility in an environment of high policy uncertainty raise the likelihood of a market correction, which could dampen growth and confidence. The more supportive policy tilt in China, especially strong credit growth, comes with rising downside risks to medium-term growth. Monetary policy normalization in some advanced economies, notably the United States, could trigger a faster-than-anticipated tightening in global financial conditions. Additionally, the G20 Summit took place this month with international leaders meeting to discuss current global issues.
Europe continued to dominate the list of the top export markets with strong manufacturing growth, with the IHS Markit Eurozone Manufacturing PMI once again reaching its highest level since April 2011.
Austria, Germany and the Netherlands each rose at their quickest paces in more than six years, with improvements also seen in France, Ireland and Italy. Greece was another bright spot, expanding ever so slightly for the first time since August, even with lingering challenges.For its part, industrial production in the Eurozone jumped 1.3 percent in May, the fastest monthly rate since November and led by strength in energy and consumer goods.
Finally, the unemployment rate in May remained stable at 9.3 percent, its lowest level since March 2009. In Asia, The Caixin China General Manufacturing PMI rose from 49.6 in May to 50.4 in June. It was the 10th time in the past 12 months that the headline index has expanded, illustrating continued progress in the economic outlook after weaknesses in 2015 and early 2016..
Mixed News in North America
The IHS Markit Canada Manufacturing PMI has decreased from 55.9 in April—a level not seen since April 2011—to 55.1 in May and 54.7 in June. In June, the data were mixed. and exports expanded at marginally faster paces, but new orders and employment decelerated a bit. Increased strength in Alberta and British Columbia and Ontario boosted the headline number, but Quebec and the rest of Canada saw decreased activity.
The IHS Markit Mexico Manufacturing PMI rose from 51.2 in May to 52.3 in June, up for the second straight month and its best reading since May 2016. New orders, output and accelerated in June, with each expanding modestly in the latest survey data. At the same time, exports slowed somewhat.
Economic growth is projected to pick up in 2017 and 2018 as headwinds from past exchange rate appreciations abate and support from fiscal policy begins to appear. Consumer spending will benefit from continued, though slowing, employment gains and, as the labor market tightens, stronger wage growth. With inflation nearing its target and unemployment edging down further, monetary policy stimulus has begun to be withdrawn gradually.
As growth picks up, further interest rate rises are projected to contain inflationary pressures and reduce the risk of financial-market distortions. Reducing the size of the central bank’s balance sheet may soon become appropriate. The Administration and Congress are formulating plans to cut taxes and boost infrastructure spending. The present projection assumes no spending increase at the federal level, but a tax reform is projected, which will support consumer spending and investment in 2018.
Second Quarter Activity
The National Association of Manufacturers released the results of their Second Quarter Survey this month. Recent improvements in sentiment have corresponded with stronger manufacturing activity—another sign that the sector is trending in the right direction.
This is especially the case with hiring and capital spending plans, both of which are a good proxy of a firm’s willingness to invest for the future. Firms forecast 3.2 percent growth in capital spending over the next 12 months, a six-year high and up from 2.1 percent in March.
This optimism stems from strong sales growth, which changed little in this survey. Respondents predict sales growth of 4.8 percent (on average) over the next 12 months, off slightly from the 4.9 percent expected growth in the prior release, which was the fastest pace in six years.
World growth is relatively stable but it will be interesting to see how these major international discussions, such as those at the G20 summit, shape policy in the coming months.
International markets remain in a state of uncertainty due to the continued ambiguity surrounding expected policy alterations from the U.S., especially regarding NAFTA. However, the Eurozone continues to emit stability despite the current political climate in the U.K. and terrorism concerns.
Against all predictors, China continues to demonstrate its economic strength, month over month and seems to be getting even more stable in its growth. Markets have not changed dramatically from last month’s update; U.S. regional indexes were mixed this past month with some regions experiencing record highs and others record lows.
The U.S. still specializes in traditional industries with other countries outstripping us in new technologies and markets. Our top trading partners are experiencing multi – year highs in their production industries, and their exports consistently surpass our own. However, Philadelphia’s special questions section shows that manufacturers expect to increase their payrolls in the coming quarters.
The current administration has declared that NAFTA is to be renegotiated which puts the U.S.’s relationships with Canada and Mexico at risk, as well as issuing other executive trade orders in past month putting trade under higher scrutiny. However, the U.S. is also planning numerous talks across Asia including in China and Korea to discuss the trade balance between continents.
Overall, world growth is relatively stable but it will be interesting to see how these major international discussions, such as those at the G20 summit, shape policy in the coming months.
See Ultra’s previous analysis on economic activity for more information.