Demand slump drags global manufacturing to financial crisis levels

Date: Friday, August 11th, 2023
Source: Nikkei Asia

Global manufacturing indicators point to a slump in demand for goods at levels comparable to the 2008 financial crisis, as China's economy sputters and consumer spending shifts toward services.

The outlook for the global economy will depend on whether the service sector can support employment on its own, analysts say.

The Pearl River delta region in southern China's Guangdong Province is known as the "the world's factory" for its large concentration of manufacturers and illustrates how supply chain constraints that had put upward pressure on global prices have been largely resolved after the turmoil caused by the COVID-19 pandemic.

The number of ships that were once stalled in ports there has fallen from a peak of more than 70 vessels in March 2022 to around 20, according to financial data provider Refintiv.

But a shortage of demand has kept manufacturers from taking full advantage of these unsnarled supply lines.

Container shipment volume from Asia to the U.S. has slumped by around 20% to 30% on the year in some months in 2023, according to the Tokyo-based Japan Maritime Center.

"While sales demand is there, retail inventories still aren't getting cleared out, and [the demand] isn't strong enough for companies to ramp up production and ship" more products, said a representative from one major container freight company.

Market players are watching the Federal Reserve Bank of New York's monthly global supply chain pressure index, which incorporates data including maritime shipping rates and manufacturing purchasing managers' index (PMI) surveys in major economies. A positive figure indicates more congestion than normal, while a negative number suggests reduced demand leading to fewer goods being shipped.

July's reading, released Friday, came in below zero for a sixth straight month at minus 0.9. May saw the figure fall to its second-lowest on record, surpassed only by the November 2008 reading of minus 1.59 during the U.S. recession, when a financial crisis dried up demand for capital goods and big-ticket consumer products like cars.

In contrast, demand for goods surged during the pandemic with consumers cooped up at home. But as the COVID-19 crisis has abated, consumption patterns have shifted from goods to services such as travel, said Daejin Leedirector for shipping analytics and research at S&P Global Commodity Insights.

Some observers see monetary tightening by central banks mainly in advanced economies playing a role. Large-scale easing during the pandemic sent asset prices soaring and drove overconsumption, while the accelerating rate hikes that followed created a credit crunch that dragged down demand.

Meanwhile, demand in the massive Chinese market has been weaker than anticipated. Official data for June showed dollar-denominated imports down from the previous month and falling on the year for a fourth consecutive month.

L'Oreal CEO Nicolas Hieronimus acknowledged in an earnings call in July that consumer confidence in China is "not yet at the pre-COVID level."

The slump in demand for physical goods is hitting manufacturers worldwide.

The U.S. manufacturing PMI from the U.S.-based Institute for Supply Management improved slightly in July to 46.4, but still stayed below 50 for a ninth straight month -- the longest such streak since the recession sparked by the 2008 financial crisis. Orders for electronics and chemicals have been particularly weak.

Meanwhile, the global manufacturing PMI from S&P Global came in under the boom-or-bust mark of 50 for an 11th straight month in July, a streak second only to that seen in 2008 and 2009. Around 70% of 29 major economies had readings indicating a contraction in manufacturing activity.

S&P Global's manufacturing PMI data showed particular weaknesses in Europe, with Germany, the region's largest economy, coming in at 38.8.

German chemicals group BASF saw a drop in demand from major customers other than automakers last quarter, and recently downgraded its full-year earnings outlook.

Large-scale consumption in China "is not kicking in the second half as it did during the financial crisis, where actually China paced out the world," BASF Chairman Martin Brudermuller said in an earnings call.

The slowdown in Japan has been relatively moderate with a PMI of 49.6 last month, as auto production ramps back up after the end of the semiconductor shortage. But slowing foreign demand is an issue. Shin-Etsu Chemical, a big producer of PVC, forecasts its first annual net profit decline in three years this fiscal year.

India, meanwhile, is faring well thanks to demand both at home and from neighbors such as Bangladesh. Mexico appears to be benefiting from companies that export to the U.S. shifting production away from China.

The U.S. and global economies are now being driven mainly by services. With employment on the rise, the risk of an immediate recession appears low, but whether that will remain the case if the chill in the manufacturing sector continues is unclear.


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