Car industry drags global manufacturing into sharp slowdown

Car industry drags global manufacturing into sharp slowdown

Global manufacturing is experiencing its sharpest and most geographically widespread downturn in at least six years, as the US-China trade war weighs on factories around the world.

The manufacturing slowdown is the main factor dragging on the global economy, fuelling fears that growth is stalling and ramping up pressure on governments and central banks to ready fresh stimulus efforts.

The gloom is centred on the car industry. 

A graphic with no description

Activity across car producers globally reached a near-record low in August, according to a widely watched sentiment survey published on Monday. The IHS Markit global car industry purchasing managers’ index recorded the sharpest decline in activity of all sectors, and its fourth lowest reading since the data series began in 2009. 

The IHS indices for industrial goods, machinery and equipment and metals and mining were also well below the 50 level, meaning more executives reported their activity was contracting than those who said it was expanding.

As a result, the overall IHS global manufacturing index remained below the 50 mark for the fourth consecutive month in August — the longest period in seven years.

The main cause is the US-China trade war and its dampening effect on many countries’ exports, according to economists. World goods export volumes contracted by 1.4 per cent in June compared to the same month last year, according to the CPB Netherlands Bureau for Economic Policy Analysis. 

“The world trade slowdown has much to do with the manufacturing downturn,” said Adam Slater, lead economist at Oxford Economics. “World trade has contracted which is quite unusual outside a recession period and it might worsen.” 

As a result of the trade tensions, global policy uncertainty has risen to its highest level since records began, according to a widely-watched index.

“Geopolitical uncertainty weighing on business capital investment remains the main drag on global industry,” said Olya Borichevska, an economist at JPMorgan. “Developments on this front need to improve for industry to lift.” 

A graphic with no description

Although survey data can sometimes prove more volatile than hard economic data, the downward sentiment trend is reflected in output figures. In June — the latest month for which hard data are available on a comparable basis for most major economies — the number of countries reporting a contraction in manufacturing output outnumbered those reporting an expansion for the first time in five years. 

Manufacturing output across the OECD’s 36 member states contracted by 1.3 per cent in June compared with the same month last year, the worst reading since the start of 2013.

The slowdown is likely to persist: sentiment survey data show that the number of countries reporting a manufacturing contraction rose in July and August, which would make it the most geographically widespread manufacturing downturn in seven years. 

A graphic with no description

“Machinery, metal and auto vehicles have driven more than half of the slowdown in global manufacturing since it peaked at the end of 2017,” said Jennifer McKeown, head of global economics at Capital Economics. “That suggests that is closely related to the weakness in investment globally, which would have affected the demand for machinery.”

The downturn started in Europe, and more specifically in Germany, the continent’s manufacturing powerhouse and most export-dependent large EU economy. New EU emission tests, fears that the US will levy tariffs on European-made cars and slowing demand for discretionary spending such as cars have all affected Europe’s car manufacturers.

A graphic with no description

But there are signs that the downturn is spreading. The US has been more resilient than Germany or Japan, but it is now catching up, according to economists. US manufacturing output fell on an annual basis in July, while the main sentiment index slipped into the contraction zone in August. 

In the US, “domestic activity has seemingly converged with the rest of the world in a full-scale downturn”, said Iaroslav Shelepko, an economist at Barclays. 

Brazil, the Philippines and Vietnam are among the few economies still defying the gloom, partially because they benefit from export-oriented manufacturing activity and investment that is being diverted from other countries because of the US-China trade dispute. 

A graphic with no description

They may not remain immune, however. “We expect trade tension to escalate, it is quite possible that trade tariffs will start to spread to other emerging markets,” said Ms McKeown. 

For the global manufacturing gloom to lift, the global economy needs either an easing in trade tensions or a fiscal stimulus by leading central banks, economists say — but neither is expected in the short term. 

As a result, Ms McKeown said, “we expect the global manufacturing downturn to continue”. 

Source link