IPP&T Magazine Online

Factory production across the globe feeling heat from U.S., China trade war

March 1, 2019   Don Horne




Factories across the globe slammed on the brakes last month as demand crashed, hit by the ongoing U.S.-China trade war, slowing global growth and political uncertainty in Europe ahead of Britain’s imminent departure from the EU.

A slew of surveys on Friday highlighted how much manufacturers are suffering, particularly those exposed to China’s slowdown, and adds weight to expectations that policy tightening from central banks is pretty much over.

Euro zone manufacturing activity went into reverse for the first time in over five years last month, British factories slashed jobs and braced for Brexit while China’s vast manufacturing industry contracted for a third straight month.

Japan’s factory gauge fell at the sharpest pace in 2-1/2 years as slumping orders prompted plants to cut production, while data from South Korea showed its exports plummeted.

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“All in all it does suggest there is a lot of weakness out there. What’s driving it is those countries which are particularly exposed to China and they have taken a hit,” Peter Dixon at Commerzbank told Reuters. “Overall it doesn’t appear to have been a particularly strong start to the year.”

IHS Markit’s February euro zone final manufacturing Purchasing Managers’ Index fell for a seventh month, coming in at 49.3, its first time below the 50 level separating growth from contraction since June 2013.

Giving little hope for a turnaround in the bloc’s fortune anytime soon, new orders fell at the fastest rate in almost six years, backlogs of work were run down, purchases of raw materials were curtailed and hiring remained weak.

Faced with a further slowdown in euro zone growth, the ECB will re-launch cheap bank loans as early as June and delay rate hikes to 2020 in a bid to stave off a recession, a Reuters poll predicted on Friday.

In Britain, which is due to leave the European Union in less than a month, factories stockpiled goods at the fastest pace seen in any Group of Seven country since records started in the early 1990s in case the country fails to get a transition deal to smooth the shock of Brexit.

“The current index reading – 52.0 – does mean the sector is still narrowly expanding, but make no mistake, the underlying details make it clear that this is only because firms are building up inventory ahead of Brexit,” James Smith at ING told Reuters.

In China, both private and official factory gauges showed activity levels remained mired near three-year lows, with a government reading on Thursday pointing to the weakest export orders since the global financial crisis.

Factories also continued to shed jobs, a trend Beijing is closely watching as it weighs more support measures.

While there was a marginal pick-up in domestic orders in China, analysts said it was too early to tell if it was due to growth-boosting measures announced by Beijing in recent months or seasonal distortions linked to the long Lunar New Year holidays early in the year.

“The upshot is that it is probably too soon to call the bottom of (China’s) current economic cycle,” Julian Evans-Pritchard, senior China economist at Capital Economics, wrote in a note after the survey. “Indeed, we expect growth to continue to come under pressure until the middle of this year.”

China watchers are looking to Premier Li Keqiang’s work report to the annual meeting of parliament next week for clues on further stimulus plans. Li will set out the government’s economic targets for the year on Tuesday.

Sources have told Reuters Beijing will set a 2019 growth target of 6.0-6.5 per cent, down from around 6.5 per cent in 2018. China reported economic growth cooled to 6.6 percent last year, its weakest pace since 1990, but some analysts believe actual activity is much weaker.

In Japan, the Markit/Nikkei Manufacturing PMI fell into contraction territory as both domestic and foreign orders slumped.

“We need to be mindful that uncertainty over the global economic outlook is heightening,” Bank of Japan board member Hitoshi Suzuki told Reuters on Thursday, after data showed the biggest drop in industrial output in a year in January.

Readings from South Korea — the first economy in Asia to report trade data each month — were equally grim. Its exports contracted 11.1 per cent in February from a year earlier, their biggest drop in nearly three years, with shipments to major buyer China slumping 17.4 per cent.

India bucked the trend, with activity expanding at the fastest pace in over a year. The findings came a day after data showed Asia’s third-largest economy grew much less than expected in the final quarter of 2018.

(Reuters)

 


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