FX volatility and emerging market weakness weighing on production
Here is a sampling of the latest global manufacturing PMIs:
- US ISM 51.1 vs 52.7 prior (low since May 2013)
- Canada RBC 49.4 vs 50.8 prior (low since April)
- China Caixin 47.3 vs 47.8 prior (low since crisis)
- Eurozone 52.3 vs 52.5 prior (two month low)
- Japan 51.7 vs 51.2 prior (high since Jan but still 5 points below 2014 levels)
- Mexico 52.4 vs 52.9 prior (second lowest since July 2014)
- South Korean exports -14.7% in Aug vs -5.9% exp
In theory, currency weakness should send production from one area to another. In practice, it's a messy process that takes time.
What happens is that both sides suffer.
Importers are suddenly hit by sticker shock from old sources of raw materials. Due to FX changes, the price are much higher. So they cut back orders, delay and hope for better prices.
Exports in suddenly high cost regions see orders quickly fall. Some buyers are hedged but they see which way the wind is blowing so they hold off on making investments. Exporters in suddenly low cost regions don't have the capacity or sales infrastructure ready. Some investments will be made but it takes time.
The FT released a study yesterday showing the theory in action.
"The FT compared changes in the value of 107 emerging market countries' currencies with their trade volumes in the following year.
The analysis found that having a weaker currency did not lead to any rise in export volumes. However, it did lead to a fall in import volumes of about 0.5 per cent for every 1 per cent a currency depreciated against the dollar," they report.
Central bankers almost always talk about FX as if it's a result of something else but it creates its own problems. I expect the global economy to move faster than ever but that's both a good and bad thing. In the short term, we're feeling the effects of the rapid slowdown.
For more, Blomberg also has a great article about the decline in manufacturing overall as a sign of a more mature global economy.
