Surveys Still Say No to Global Recession

With each passing day, we see more and more headlines warn of impending global recession. Yet economic data still generally don’t support that argument, in our view. The latest business surveys imply ongoing growth—another overlooked positive amid today’s dreary sentiment backdrop.

Though most major developed countries’ flash May purchasing managers’ indexes (PMIs) missed consensus expectations, they were also uniformly well above 50—suggesting expansion. (Exhibit 1) On an individual nation basis, many headlines focused on the UK’s weakest services PMI reading in 15 months, as survey respondents blamed economic and geopolitical uncertainty for the slowdown in client demand.^[i] What got a little less attention: PMIs out of the eurozone and its two largest economies, Germany and France, continued showing growth despite myriad warnings that the Russia – Ukraine war would roil economic activity on the Continent.

Exhibit 1: The Latest PMIs

Source: FactSet and S&P Global, as of 5/25/2022.

Flash estimates reflect about 85% – 90% of total survey responses, so it is possible May’s final results get revised slightly. But we think those updates are unlikely to materially alter the main message: The majority of reporting businesses are expanding. As always, PMIs aren’t perfect, as the surveys reveal the breadth of growth—how many businesses reported expansion. That is unlike output data like GDP, which tally the magnitude, so we don’t know how much businesses grew or shrank in aggregate. However, PMIs offer a timely snapshot of recent economic conditions—and usually give a good sense of broad economic direction. 

Based on our coverage, the takeaways from May’s preliminary PMIs revolved around negatives that have led headlines for months. For example, UK goods producers pointed out growth headwinds tied to the war in Ukraine; Japanese manufacturers noted heightened supply chain pressures due to renewed lockdowns in China; and US firms reported a notable uptick in input costs.^[ii]

While pessimism colored the coverage, PMI respondents also raised some positives—specifically, COVID restrictions’ easing as an offset to headwinds. Japan saw the strongest rise in services activity in five months thanks to the reduced impact of COVID restrictions, benefiting the tourism sector.^[iii] In France, businesses reported the resumption of projects previously put on hold and the return of trade shows and public events boosted economic activity.^[iv]

Germany’s May flash PMI seems particularly noteworthy to us. Just a couple months ago, many thought recession in Europe’s largest economy was highly likely, tied to its large manufacturing sector’s energy intensity and exposure to raw materials in short supply. PMIs from January – March argued against that dour forecast, and official German GDP confirmed it was off base after 0.2% q/q growth in Q1.^[v] And now, as S&P Global Economics Associate Director Phil Smith noted, “A post-lockdown recovery in services activity continues to provide a strong tailwind for the German economy … Even manufacturing saw a slightly better performance in terms of production levels in May.”^[vi] German PMIs remain expansionary thus far in Q2 despite the ongoing war—more evidence of the economy’s resilience.^[vii]

We don’t dismiss the possibility of an economic downturn lurking, but to cause a global recession, the negative must be capable of destroying trillions of dollars in global GDP. We don’t see anything that fits the bill right now. Yes, there are plenty of regional headwinds (e.g., China’s latest lockdowns). But unless a negative morphs into something with the scale of roiling the global economy, a global recession is unlikely. Critically, today’s negatives are also broadly discussed, sapping their ability to sneak up on anyone.   

Moreover, signs of a looming global recession aren’t showing up in most broad data. Despite the war in Ukraine, data, including PMIs, continue pointing to eurozone growth—arguing against a regional recession on the Continent. We think PMIs better resemble a return to pre-pandemic trends, with countries getting back to a more “normal” mix of economic activity within the services and manufacturing sectors—where the former dominates GDP. As society makes its way to a post-COVID reality and learns to live with the virus, we expect services to continue chugging along, benefiting those developed world, services-driven economies.

Now, individual nations or even regions may struggle, and some may even suffer recessions. However, that is true even during long-running global expansions. But pockets of weakness don’t automatically derail everything else. Very often, areas of strength wind up pulling them along. In our view, reality continues to look better than many seem to appreciate, especially amid the prevalent pessimism right now. The big disconnect between expectations and economic reality is reason to be bullish today, in our view.