Winter is coming

Purchasing managers do what the name suggests, they buy in the raw materials, energy, components and other products that companies need in order to do business. They are therefore lead indicators of what is happening in the economy. If the purchasing manager is told he needs to buy less printer ink, aluminium or electricity, it indicates that the company is going to be doing less business in coming months, not more.

Which means that August’s PMIs for the eurozone make for very worrying reading, Germany and France are doing far worse than expected, Germany’s alone fell a startling 3.8 to 44.7, a level not seen since the Covid pandemic, or before that the global credit crunch. The eurozone’s composite PMI is down to an almost 3 year low of 47 – anything below 50 means things are getting worse.

Weaker service sectors are driving the declines. Manufacturing is already pretty dire, pointing to a third quarter economic contraction in the Eurozone. For those who like to mock the EU every time things go wrong, I should point out that the UK is not doing well either.

UK services’ PMI is at a seven-month low at 48.7 and manufacturing’s PMI is at 42.5, a 39-month low.

All of this suggests that the future is bleak both here and on the continent. Higher energy and commodity prices are still working their way through the system and the central banks are meeting those inflationary pressures head on with much higher interest rates.

Business is caught in the middle with higher costs, the prospect of lower demand as interest rates suck money from consumer’s pockets, a much higher cost of investing and a war in Europe that has no end in sight. Meanwhile China has problems of its own, with a dangerously over-inflated property market, rising unemployment and an anaemic response from a one-party state.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence says the UK’s results suggest that “A renewed contraction of the economy already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival. The survey is indicative of GDP declining by 0.2% over the third quarter so far.”

Exactly the same level of downturn is also now expected in the Eurozone.
Even American growth seems to be faltering, ahead of next year’s election.
Governments have been trying to dodge this bullet with varying degrees of success, but it looks like they are now all failing.

Soaring inflation and the battle to contain it are going to start really hurting. This is what central banks have been designed to do: beat inflation out of the system even if it means a recession.

Winter is coming and it is going to get cold.