Global manufacturing - Headwinds intensify, price pressures keep fading

Global manufacturing PMI falls to two-year low

The manufacturing PMIs for August published over the past week point to a further weakening of momentum in global industry, with an energy-driven global surge in inflation strongly hitting demand (see our August Global Monthly here). The global manufacturing PMI dropped by almost a full point to 50.3 (July: 51.1). This marked yet another fresh low since July 2020, when global manufacturing was still to enter a sharp rebound from the initial Covid-19 shock in the first half of 2020. Both the aggregate indices for developed markets (DMs) and emerging markets (EMs) continued their slide.

The aggregate index for DMs fell by one point to 50.3, just above the neutral mark separating expansion from contraction. That compares to a level of around 56.5 in the first few months of the year. Particularly striking was the five point’ drop in the index for the UK, to 47.3. The aggregate index for emerging markets (EMs) fell by 0.6 points to 50.2, with China’s Caixin PMI dropping back to below 50 reflecting headwinds from Covid-19 policy, property sector woes and heatwave driven power shortages (see our previous China comments here).

Global cost-push price pressures continue to ease

The various components of the August global manufacturing PMIs show that, like in July, the weakening momentum was visible both on the supply and the demand side. On the supply side, the global output component dropped back to below the neutral 50 mark (49.4 versus 50.1 in July), with the aggregate output index for DMs and EMs at 47.5 (July: 48.4) and 51.1 (July: 51.7), respectively. On the demand side, the picture was even bleaker: the global components for domestic orders and for export orders fell to 48.2 (July: 48.9) and 47.0 (July: 48.0), respectively, with weakness particularly concentrated among DMs.

With global demand cooling rapidly, there are ongoing signs that global supply-demand imbalances and cost push price pressures are fading. The global component for delivery times rose by two points to a 22-month high of 44.8 (July: 42.8), indicating some improvement on this front. Meanwhile, the global components for input and output prices continued their slide from the peaks reached in April this year. The global index for input prices fell by 4.5 points to 61.1 (July: 65.4), while the component for output prices dropped to 56.7 (July: 58.3). This easing is tied to the cooling seen in global commodity markets in recent months, despite continued 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, the UK and the Netherlands.

Our global supply bottlenecks index eases further

Although all kinds of supply issues are still dominating the headlines (e.g. Russian gas cut-off in Europe, tight labour markets), from a global macro perspective imbalances in the global supply of and demand for goods are fading. This is also shown by our global supply bottlenecks index, which points to a further fading of supply-demand imbalances. To a large extent this is driven by a weakening in demand indicators in DMs (the end users in global supply chains), which caused a jump in the ratio ‘output EMs versus orders DMs’ (although this ratio stabilised in recent months). Still, most variables included in our index point to an easing of supply bottlenecks and supply-demand imbalances. Container freight tariffs keep falling and are back to May 2021 levels, the Baltic Dry Index has plummeted, delivery times are normalising, backlogs have come down and lead times for semiconductors have stopped rising.