Donald Trump with Chinese President Xi Jinping Carlos Barria/Reuters

PMI reports are regarded as being as good an indicator as any on the health of the global economy.

In June, new exports orders from China, Japan and the ASEAN regional all declined, pointing to a softening in global demand.

The United States is set to slap 25% tariffs on $34 billion worth of Chinese imports from Friday, increasing the risk that global demand could weaken further.



If you're looking for clues on how the global economy is faring right now, there are few better lead indicators out there than purchasing managers indexes, or PMIs for short.

Arriving at the start of each month, they provide a real-time snapshot of what firms are seeing on the ground, providing an early indicator on what the hard data may show when released in the months ahead.

With the odd exception, they do a pretty good job.

Being the first day of the month today, it's the global manufacturing sector that's in focus.

The manufacturing PMI reports across the Asian region are now coming in thick and fast, and while the performance from individual nations has been a mixed bag so far, there's one trend that's been evident across the vast majority of reports, especially those from major manufacturing nations.

New export orders - a lead indicator on global demand - are softening.

Here's the commentary on new orders from China from IHS Markit, the group that compiles most PMI reports globally.

New export sales fell for the third month in a row amid reports of subdued foreign demand.

And here's what the group said in relation to demand for Japanese exports.

Sales to overseas clients declined for the first time in 22 months. Panellists mentioned that a combination of higher prices and weaker demand from North America and China had impacted export performance.

Finally, here's IHS Markit's assessment on new demand from the ASEAN region, Vietnam, Singapore, the Philippines, Indonesia, Thailand, Myanmar and Malaysia.

Although total new orders increased at a slower pace in June, growth remained above the historical trend. Underlying data suggested that firmer domestic demand was the primary driver of growth due to poor export performances. Overseas sales returned to decline in June.

So new export orders from the second and third-largest economies globally, and one of the largest and fastest-growing economic blocs, are not only slowing but going backwards.

Not exactly a good sign for global demand given the reach of these nations. Nor is it a good sign for the Asian region given how trade dependent so many nations are across the region.

Just take a look at this chart below from Nomura showing the most trade-exposed economies worldwide.

Nomura

While the obvious explanation for the weakening in global demand is the continued escalation in trade tensions between China and the United States, the slowdown began in February this year, before trade concerns really escalated, casting doubt as to whether this has been the major factor behind the drop-off in demand.

It's likely been a factor, but the moderation could also reflect that after stellar recovery in the second half of 2016 and throughout 2017, the global economy has lost a bit of momentum in recent months.

The question now is what will happen next? Is this just a blip on the recovery path or the start of a longer-lasting trend?

No one really knows the answer with much depending on whether the United States and China can resolve their differences.

As things currently stand, the United States will introduce 25% tariffs on $34 billion worth of select Chinese imports on Friday this week. China has also announced reciprocal tariffs of 25% on the same amount of US imports.

Should these tariffs shift from being proposed to actual, it will almost certainly slow global trade demand, and increase the risk of additional tariffs being introduced by other nations in an attempt to protect their industries.

It looks set to be a crucial week for the global economy, especially at a time when demand is already softening.

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