Domestic economic data disappointed this week, with rising fuel costs weighing on private-sector activity and manufacturing production. Globally, however, stronger retail sales in the eurozone and higher industrial production in Germany pointed to some resilience amid the ongoing fuel price shock. Similarly, sustained expansion in the US services sector suggested that the economy continues to hold up.

The full Weekly considers whether this resilience can withstand a further escalation in the Iran war and the resulting surge in oil prices.

DOMESTIC DATA

Nadia Matulich

PRICE PRESSURES AND LOGISTICAL DISRUPTIONS WEIGH ON THE PRIVATE SECTOR

The S&P Global PMI returned to contractionary territory, declining from 50.5 in August to 49.0 in September. This reflected renewed contractions in business activity and new orders. Firms reported rising input prices, particularly fuel costs, alongside lengthening supplier delivery times due to disruptions at the Durban port. However, these logistical challenges are expected to be temporary rather than indicative of a sustained deterioration in port operations. Firms also highlighted uncertainty and volatility in fuel and oil markets, with some of these cost pressures expected to persist into Q4. Employment remained relatively unchanged, continuing the subdued trend observed in August.

MANUFACTURING PRODUCTION CONTRACTS SHARPLY IN AUGUST

Manufacturing production declined by 3.1% m-o-m in August, reversing the 2.2% expansion recorded in July. This translated into a 4.3% y-o-y contraction, with declines recorded across most manufacturing subsectors. The largest contributor to the annual decline was the petroleum, chemical products, rubber and plastic products division, with production falling by 5% y-o-y, subtracting 1.1 % pts from the headline figure. This was followed by motor vehicles, parts and accessories and other transport equipment (-8.8%, contributing -0.7% pts); wood and wood products, paper, publishing and printing (-7%, -0.7% pts); food and beverages (-3%, -0.7% pts); and basic iron and steel, non-ferrous metal products, metal products and machinery (-3%, -0.7% pts). Textiles, clothing, leather and footwear was the only subsector to make a positive contribution, with production rising by 5.7% y-o-y and adding 0.2% pts to the headline figure. The remaining subsectors also contracted, although their contributions to the overall decline were relatively small.

INTERNATIONAL DATA

Kele Mabitsi

SOARING ENERGY PRICES BOOST EZ PPI

Annual producer inflation accelerated from 5.8% in July to 8.2% in August, as renewed tensions in the Middle East raised energy prices (21% y-o-y). Barring energy, factory-gate prices increased by 3.4% in August, up from 3.1% in July. Producer costs also rose for durable consumer goods and intermediate goods, while declining further for non-durable consumer goods. On a monthly basis, producer inflation edged up from 1.6% in July to 1.9% in August.

Meanwhile, EZ’s retail sales grew by 0.8% y-o-y in August, following a 0.4% y-o-y gain in July. Sales rose for food, drinks, and tobacco (1.6%) and non-food products (1.7%). In contrast, the headline figure was pulled down by a 3.7% plunge in automotive fuel sales.

GERMANY’S INDUSTRIAL PRODUCTION REBOUNDS TO AN 18-MONTH HIGH

Germany’s industrial production increased by 2% m-o-m in August, up from July’s 1.2% m-o-m contraction. Production expanded for construction (9.3%) and mechanical engineering (5.3%). Meanwhile, production in the automotive industry declined by 5.4% due to standard factory shutdowns.  

US SERVICES ACTIVITY EXPANDS FOR THE 27^TH MONTH IN A ROW

The ISM Services PMI edged lower from 55.4 in August to 54.9 in September, pointing to a slight moderation in the pace of expansion. Business activity and new orders recorded softer growth, while the employment index marked its first expansion in three months. Interestingly, inventories grew further amid worsening supply-chain delays. Although part of this is also due to precautionary buying by firms to hedge against price hikes. Meanwhile, cost pressures intensified, with the price index rising to its highest level since July 2022 at 74 as fuel prices remained elevated. Although respondents cited higher fuel costs as a key constraint on business, the US private sector remains resilient, highlighted by its continued growth throughout the volatile backdrop over the last 2 years.