For Underappreciated Growth, Look East

New month, new batch of business surveys. We highlighted February flash purchasing managers’ indexes (PMIs) for the US, UK and eurozone last week, and the final readings didn’t reveal much new insight. But today, S&P Global also released a spate of expansionary services PMIs. February growth, particularly out of the Asia and Pacific region, suggests activity from a big part of the global economy is rebounding—an overlooked positive, in our view.

Most of S&P Global’s services PMIs out of the Pacific topped 50 in February—implying expansion. (Exhibit 1)

Exhibit 1: Services PMIs Out of the Pacific

Source: FactSet, as 3/3/2023.

Easing COVID restrictions contributed to higher services sector activity in China, Hong Kong and Japan in particular. Now, we have seen this type of rebound before, both in China and elsewhere, but February’s growth wasn’t tied solely to the removal of pandemic measures. Resilient domestic demand and strong new orders drove India’s fastest services PMI expansion in 12 years—an encouraging sign after GDP’s slowdown from Q3’s 6.3% y/y to Q4’s 4.4%.^[i] Australia’s services PMI edged above 50 for the first time since last September thanks to stable demand and businesses catching up on outstanding orders. PMIs indicate economic growth’s breadth, not its magnitude, and they don’t always correlate with output measures. But even slow growth contributes to global GDP. 

We think services growth is noteworthy given the attention some Asian manufacturing numbers received earlier this week. Though headlines cheered the jump in China’s factory activity—the official February manufacturing PMI rose to 52.6 from January’s 50.1—many fretted Japan’s February manufacturing PMI falling to 47.7 from January’s 48.9, its worst reading since September 2020.^[ii] But similar to major economies in North America and Western Europe, the services sector drives the lion’s share of activity in major Asian and Pacific economies. (Exhibit 2) Even in China, services comprises the majority of output. Combined, these six economies make up nearly 30% of world GDP—so reaccelerating growth here contributes nicely to the global economy.^[iii]

Exhibit 2: Services’ Share in Select Asia and Pacific Economies

Source: The World Bank, as of 3/3/2023. Services on a gross value added basis. All figures reflect 2021 except for Japan (2020).

Consider, too, that Asia does a lot of the heavy lifting for the global economy. According to the IMF, growth in the region slowed sharply last year—as was the case worldwide.^[iv] Though the supranational organization projects growth in North America, Western Europe and advanced economies in general to decelerate again this year, it expects growth in Asia and the Pacific to accelerate.^[v] Now, we always take these forecasts with a grain of salt, as they are regularly revised as new data come in and conditions evolve. But even if other regions slow as anticipated (e.g., the eurozone and the UK), faster Asia-Pacific expansion may pull the weaker areas along and buoy demand for goods and services provided by publicly traded companies the world over. February PMIs are an early indication this may be happening—an underappreciated positive worth noting for global investors, in our view.