Per recent manufacturing indicators, Europe's economy may surprise on the upside in 2016, while China is likely to continue stumbling along, says Morningstar's Bob Johnson.
Bob Johnson: This week's chart represents two very divergent manufacturing economies. It shows that China is doing worse and Europe is doing better. This particular chart focuses on a purchasing manager index. What it does is it asks purchasing managers a very simple set of questions: Are things better or worse than they were the month before?
Loosely, the numbers are the percentage of managers who are more bullish than they were the month before. The European reading shows an index reading greater than 50, at 53 or so. That's an excellent reading, and you can tell from the slope of the line that their optimism is growing. On the other hand, China continues to erode. Their reading was just 48.2, suggesting more managers were bearish than bullish. And that trend continues to get worse.
The divergence probably stems from the quantitative-easing program in Europe and, on the converse, China's emphasis more on the consumer than on investment and exports.
Unfortunately, China is more dependent on manufacturing--about 30% to 35% of GDP--while that number is a lower 20% to 25% in Europe. Clearly, that's why the markets reacted so negatively this week when the data was released.
Going forward, the data suggests that Europe might provide an upside surprise in 2016, while China may continue to stumble along.
