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Author: PublicInvest   |   Latest post: Fri, 24 Jan 2020, 2:52 PM

 

October 2019 Producer Price Index - Deeper Pain

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REVIEW

It was another challenging month for the Producer Price Index (PPI), reflected by the widening contraction in October vis-à-vis September. This is troubling given the negative ramifications to macroeconomic outlook. PPI for October slipped to a deeper YoY decline of -2.9% (September: -2.4%) on the back of a bigger contraction in mining (-18.2%) and manufacturing (-1.3%) despite the recovery in agriculture, fishing and forestry (+1.5%) and electricity and gas supply (+1.3%).

The decline in mining, coincidentally down to our lowest for the year and since May 2016, is a concern as this may affect growth given that mining represents about 7.6% of the economy. The sustained contraction in manufacturing is not a surprise as demand has remained weak due to the failure of US and China to reach a deal on trade matters. Both sectors represent about 30% of the economy.

PPI’s YTD average of -2.1% (YTD 2018: -0.7%) may not recover so soon given cautious sentiment over trade. This is also consistent with the less-than inspiring October PMI manufacturing index that remained below the neutral level (49.3) amid the difficulties for manufacturers to raise prices given the need to stay competitive.

On a MoM basis, PPI growth dropped to -0.2% (September: 0.7%) hurt by the decrease in mining (-2.5%) though this was offset by steady manufacturing activity (+0.1%). The less-than-sanguine YTD PPI mirrors the weak CPI trend which has remained subdued in 2019 (YTD October: 0.6%). Three of the PPI’s sub-indexes produced uninspiring numbers in October led by mining (-18.2%), water supply (-1.8%) and manufacturing (-1.3%). Only electricity and gas supply (+1.3%) and agriculture, fishing and forestry (+1.5%) delivered positive numbers for the month

Mining sector performance deteriorated further in October (-18.2%; September: -14.4%; August: -10.9%), a reflection of global oil prices which has remained weak due to a less-than-favourable supply and demand conditions. The outlook on mining and manufacturing could improve however once there is a breakthrough in US and China trade negotiations, a prospect we cautiously expect in 2020, if not earlier.

OUTLOOK

The key to the recovery in the PPI lies in the ability of the US and China in finding an amicable solution over its trade issues. This will trigger a recovery in demand and therefore, a turnaround in high frequency statistics including the PMI, IPI, PPI and CPI and consequently, growth. Mining and manufacturing sectors are expected to be the first to recover which is crucial given their large share in the economy.

Source: PublicInvest Research - 9 Dec 2019

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