Global manufacturing momentum gathers pace

Global manufacturing is accelerating as artificial intelligence investment lifts developed markets while the UK activity slows and Australia’s softer labor data leaves the RBA poised to hike next week.

• Glpbal: Manufacturing momentum
• UK: Private sectoor lost momentum
• Australia: Labor softness, RBA to still hike
• Spotlight on next week
  

Weekly highlights

Global: Manufacturing momentum

Following an extended period of about three years of marginal contraction or very tepid, marginal growth, global manufacturing activity has picked up notably over the last six months. The upturn has been driven primarily by developed markets whose composite manufacturing PMI now sits more than two points above the emerging market equivalent. This is a big relative change from the 2023–2025 period, when emerging markets outperformed.

This improvement is directly related to artificial intelligence investments globally, but especially in developed economies. Within this group, the US, Japan, and Taiwan exhibit the strongest momentum, with the latest readings around or above 55 (the US soared to 57.0 in the preliminary September reading) and Korea and the eurozone more moderate at about 52.0.

Stronger activity has lifted capacity utilization and has lengthened supplier delivery times (Figure 1, page 3). This is adding to concerns around inflationary pressures globally, although it is important to note that both on capacity utilization and supply chain metrics, current readings suggest far less strain than during the post-Covid reopening phase. This is encouraging, although the surge in oil and other commodity prices means the price metrics themselves have risen more sharply.
 

UK: Private sector lost momentum

Businesses are losing steam just as costs are climbing. Business activity lost momentum in September. The flash S&P Global composite PMI slipped from 52.5 in August to a 3-month low of 51.7, largely because of weaker services. The slowdown came as conditions in the Middle East deteriorated. Oil prices rose to their highest since May, while natural gas prices reached levels last seen in early 2023. Input costs jumped and were passed on in higher selling prices. Unless oil and gas prices retreat sharply, the BoE is likely to raise Bank Rate by a quarter-point in November, with another increase probably following in February. 

Australia: Labor softness, RBA to still hike

Headline employment rose a stronger-than-expected 39.5k in August, but the underlying labor market picture softened at the margin. Full-time employment fell by 6.3k, while the unemployment rate rose to 4.646%, narrowly missing a round-up to 4.7%. The main positive surprise came from hours worked, which increased a solid 0.7% MoM.

Overall, the labor market is moving closer to our 4.8% unemployment rate forecast and appears softer than expected. However, we would caution against over-interpreting the rise in unemployment. The ABS noted unusually large sampling variability between April and July, alongside the possibility that supplementary survey effects amplified seasonal distortions. As a result, we think the direction of travel is broadly accurate, but the magnitude of the deterioration may be overstated. The ABS also introduced a new supplementary survey collection model in August. While the agency indicated that any impact on monthly movements should be smaller than normal sampling variability, the methodological changes provide another reason not to place too much weight on a single month’s outcome.

Consequently, while we continue to view the weakness in full-time employment as largely cyclical, we are less convinced that the labor market is undergoing a more meaningful transition. If anything, that signal has weakened at the margin, suggesting that a further rate hike could still help stabilize labor market dynamics rather than exacerbate any deterioration.

Attention now shifts to a crucial week for Australia, with the Reserve Bank of Australia (RBA) policy meeting followed by the August CPI release the following day.

The employment report is unlikely to materially alter the RBA’s decision next week. Our base case remains a 25bp rate hike, although the softer labor market backdrop raises the possibility of somewhat less hawkish guidance and a reduced sense of urgency around further tightening. Even so, we expect the RBA to retain a tightening bias given that inflation remains above target and is likely to move higher in the near term.

We forecast headline CPI to rise to 4.1% YoY in August, while trimmed mean inflation remains sticky at 3.6% YoY. Against that backdrop, labor market conditions, while clearly softening, are not yet weak enough to materially shift the policy outlook. The hurdle for a dovish pivot remains high. 

Spotlight on next week

• US jobs growth to remain robust. 
• The RBA to hike again
• Japan’s Q3 Tankan may show strong manufacturing outlook.