World Can Benefit From China Recovery, But U.S. May Dominate If Historical Correlations Hold

A clear trend was evident in terms of China's March PMI prints. The services, or non-manufacturing side, clearly outperformed the manufacturing side. This was most evident in terms of the Caixin PMI: 57.8 for services, versus 50.0 for manufacturing. For the official PMIs it was 58.2 for services, 51.9 for manufacturing.

• At face value, the rest of the world may prefer to be seeing the reverse holding, that is manufacturing outperforming services. A better manufacturing backdrop in China compared to services may have more spill-over effects to the rest of the world. However, historical correlations don't suggest this is the case.
• The table below presents long run correlations (2008 to present) for the y/y changes in China manufacturing and service PMIs (we use the official prints due to longer time series), against the y/y change in global IP, trade volumes and EM exports.
• If anything, the services correlations sit slightly higher. Correlations can shift of course, but even looking at shorter run correlations for the past year, similar trends are evident. This still suggests some positive spill over from the surging China services recovery to the rest of the world. Indeed, the WTO revised higher its global trade forecast, albeit still with downside risks (see this link).
• Interestingly though, the bottom 2 rows replicate the same correlations but for the US ISM manufacturing and services PMIs. Similar results unfold in terms of correlations being roughly similar for manufacturing and services.
• There is a clear levels difference though, relative to the China PMI correlations. This suggests how the US cycle evolves, proxied by ISM trends, may dominate the global outlook as we progress through 2023.

Table 1: China PMI & US ISMs Y/Y Correlations With Global Trade, IP, & EM Exports

(2008-To Present)

Source: MNI - Market News/Bloomberg