Global manufacturing: Supply-demand imbalances and cost price pressures fade

Global Macro: Global manufacturing PMI drops further

The July PMIs for a wide range of developed markets (DMs) and emerging markets (EMs) have been published earlier this month. After having been quite stable at around 52.2 in April-June, the global (aggregate) manufacturing PMI dropped by 1.1 point to 51.1. This marked the weakest reading since July 2020, when global manufacturing was still to enter a stark rebound from the initial Covid-19 shock in the first half of 2020. The weakening in July was spread amongst both DMs and EMs. The aggregate index for DMs fell by 1.2 point to 51.3. The aggrate EM index dropped 0.9 point to 50.8, although remaining above the neutral 50 mark separating expansion from contraction. In March-April 2022, the EM index had fallen below the 50 mark reflecting the lockdown slump in China. China’s manufacturing PMIs (both the official one and the one published by Caixin) did show a sharp rebound in May and June, with Beijing prioritising the normalisation of production (and transport) over supporting consumption. That said, Covid-19 flare-ups and property sector woes seem to have left their mark in July, with both manufacturing PMIs for China coming down somewhat again last month.

Weakness both at supply and demand side, global cost push pressures ease further

As we highlighted last month (see here), the various subcomponents of the June PMIs pointed to a firming of the production side (driven by post-lockdown normalisation in China) coupled with weakening demand indicators driven by DMs. The July PMIs point to a more broad-based weakening, both on the supply and demand side. The global output component fell by almost 2.5 points to slightly above the neutral mark, with weakness spread over both DMs and EMs. On the demand side, the global sub-index for new orders dropped by a full point to below the 50 mark (49.0), whereas the exports component fell even further into contraction territory (48.0). Meanwhile, the sub-index for delivery times rose further to 42.7, the strongest reading since November 2020. Last but not least, the July PMIs also point to a further easing of global cost push price pressures, with global components for both input and out prices falling to 1.5 year lows (although remaining at elevated levels from a historic perspective). This stems to a large extent from a cooling in global commodity markets, despite remaining risks in energy markets and in particular that of a Russian gas cut-off to Europe that has caused us to forecast a recession in the eurozone (see our recent analysis here).

Imbalances in global supply and demand for goods are easing

Although all kinds of supply issues are still very much at play and dominating the headlines (e.g. gas cut-off and low water levels in Europe, tight labour markets etcetera), from a global macro perspective imbalances in the global supply of and demand for goods are fading. Indicative for this is also the dramatic improvement in our global supply bottlenecks index seen last month. This was mainly driven by the sharp swing in a key component of this index: the ratio of the global manufacturing output component for EMs versus the orders components for DMs. Once more we should add that our index is a global macro indicator capturing supply and demand imbalances for goods (to a large extent based on global manufacturing PMIs) and related global logistics, but does not measure shocks and (price) volatility in specific commodity markets, nor domestic supply issues such as scarcity in labour markets or congestion in specific ports or domestic transport chains (such as transport problems due to low water levels).

Container freight tariffs keep falling despite Taiwan Strait tensions

Meanwhile, other components of our index also point at the easing of bottlenecks in global production and transport. The global lead time for semiconductors has stopped rising over the past few months. The global benchmark for container freight tariffs has dropped by 35% since October 2021, although is still more than four times higher than pre-pandemic levels. Strikingly, the reported freight tariffs for transport from Shanghai to both Los Angeles and Rotterdam have continued to fall over the past week, despite China’s extended military drill in the Taiwan Street. While these drills have caused some regional disturbances in shipping and air traffic over the past week, the fall-out so far seems manageable. That said, although China has ended these drills, it has announced regular patrols in the Taiwan Street going forward. Although it is still early days, a possible re-escalation of tensions in the future could have more serious consequences for global supply (including transport) chains, given the importance of the Taiwan Strait in global container traffic and the dominant position of Taiwan in the global production of chips.