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Is the post-pandemic growth rebound running out of steam this month, as the Delta variant hits economies around the world?
New economic data from Australia and Japan this morning show that activity slowed in August, ahead of a healthcheck on companies in the UK, the eurozone and the US.
In Australia, private sector output is shrinking at a faster rate this month as the recent lockdowns introduced in parts of the country bite.
A ‘flash’ survey of purchasing managers across the country show that the service sector contracted more sharply, as the pandemic continued to dampen demand and output. Some firms were forced to cut staff, as cases hit record levels.
This pulled the IHS Markit Flash Australia Composite Output Index down to a 15-month low of 43.5 in August, from 45.2 in July [any reading below 50 shows a contraction].
This shows the “continued toll that the Delta COVID-19 wave is taking on Australia’s private sector economy”, Markit says.
Jingyi Pan, economics associate director at IHS Markit, said:
“Australia’s private sector remained stuck in decline in August, according to the latest IHS Markit Flash Australia Composite PMI data, as activity remained heavily impacted by current mobility restrictions brought about by the spread of the COVID-19 Delta variant.
Not only were demand and business activity hit, employment conditions also deteriorated, with private sector staffing levels falling for the first time since October 2020. The labour market situation had been made worse on both ends of supply and demand amid the latest COVID-19 disruptions.
But firms are a little more optimistic, Pan adds:
“The one bright spot had been an improvement in the outlook amongst Australian private sector firms in August, with hopes of an improvement in the COVID-19 situation expected to spark an eventual rebound for the Australian economy.”
It’s a similar picture in Japan, where factory activity growth slowed in August, while that of the services sector shrank at the fastest pace since May 2020.
This pulled Japan’s flash Composite Output Index down to 45.9 for August, from July’s 48.8, showing the fastest contraction in a year – as a recent wave of COVID-19 infections is taking on the economy.
- Flash Services Business Activity Index, August: 43.5 (July Final: 47.4)
- Flash Manufacturing Output Index, August: 51.0 (July Final: 51.8)
Usamah Bhatti, economist at IHS Markit, said business conditions in Japan deteriorated further in August.
The latest contraction was the quickest recorded since August 2020, while incoming business was reduced at the sharpest pace for seven months. Survey respondents commonly attributed weaker demand to ongoing COVID-19 restrictions, coupled with sustained supply chain pressures.
The decline in overall private sector activity was led by the larger services sector, where business activity fell for the nineteenth consecutive month and at the quickest pace since May 2020. While manufacturers pointed to continued output growth, the rate of expansion softened from July.
Japanese private sector businesses noted that the recent surge in COVID-19 cases related to the Delta variant had dampened prospects in the latest survey period, as firms indicated the softest degree of optimism regarding the year-ahead outlook for one year. That said, positive sentiment was solid overall as vaccination rates continued to increase markedly.”
Flash PMI surveys from the UK this morning, along with France, Germany and the wider eurozone, are expected to show a slowdown in growth in August — although comfortably in ‘expansion’ territory.
Michael Hewson of CMC Markets has the details:
In July German manufacturing rose to 65.9, and services jumped sharply to 61.8. It would be a surprise if either of these came in anywhere close this month given the various shutdowns of production announced by businesses because of supply chain disruptions and parts shortages. Forecasts are for a slowdown to 65 and 61 respectively, both of which come across as a tad optimistic.
Likewise, in France there has been increasing evidence that business activity has been declining with both manufacturing and services both slipping back in July from their June levels, and set to do so again in August to 57.2 and 56.3 respectively.
In the UK the pingdemic has already caused a slowdown in services in July, from the May peaks of 62.9, falling back to 59.6 in July, largely because of the so-called “pingdemic” which resulted in staff shortages, and various business disruptions. It’s also important to remember that while services have seen a decent rebound in the last few months, certain sectors are still struggling as a result of consumer behaviour which is much more cautious than it would have been pre-pandemic, which suggests we could see another softer reading of 59.1.
These PMI reports will also show whether companies are still suffering from record cost inflation, in the scramble for parts and workers.
European stock markets are expected to start the new week with gains, after posting their biggest weekly decline since February. Stocks on Asia-Pacific bourses have already rallied, with oil also strengthening, after China reported zero new Covid-19 cases for the first time since July.
Investors will also have an eye on Sainsburys, amid reports that the supermarket chain is being eyed up by private equity companies.
- 9am BST: eurozone ‘flash’ manufacturing and services PMI for August
- 9.30am BST: UK ‘flash’ manufacturing and services PMI for August
- 11am BST: Germany’s Bundesbank Monthly Report
- 2.45pm BST: US ‘flash’ manufacturing and services PMI for August