Global manufacturing steady in late 2021, but Omicron poses risks

Global Macro: Global manufacturing PMI ex-delivery times improved in Q4-21

Over the past few days, manufacturing PMIs for December 2022 were published for awide range of developed and emerging markets. The headline global manufacturing PMI for December was unchanged compared to November (54.2) and has hardly moved over the past five months. Still, if we correct for still-lengthy delivery times (particularly in developed economies), we see some firming of the global index (see left chart below), with the subindex for delivery times slightly improving. This suggests that – on balance - supply side issues even eased somewhat in the final quarter of last year, although it is of course too soon for these figures to reflect any impact from the current global Omicron wave.

Omicron brings additional risks of disturbances

Recent developments confirm that global supply issues are far from over. The prevailing global scarcity in semiconductors is illustrated by an ongoing rise in delivery times, reaching a record high of 25.8 weeks in December. The lockdown in the Chinese chip-producing city Xian and the closure of a chips manufacturing site in Berlin (the latter not related to the pandemic) may add further strains in this respect. What is more, global container freight tariffs have not continued their downward correction that started in September/October,and are still 7-9 times higher compared to pre-pandemic (2019 average) levels. The rapid spread of the global Omicron wave combined with strict covid-19 policies in Asia brings additional risks of further disturbances in global supply chains (production and/or transport), just as the Delta flare-up did last year. As we wrote in our annual outlook for 2022, Omicron reduced the likelihood that China will ease its zero-tolerance covid-19 policy anytime soon, with the Xian lockdown being a clear example.

Two sides of the coin: supply versus demand

We should add that supply-demand imbalances are obviously not only a function of supplyrigidity, but also of the strong demand for goods. In the right chart above, we have plotted the ratio between the global PMI output component versus the demand components (new domestic and export orders). This chart presents a clear illustration of the initial, short-lived supply shock in China in early 2020 and the subsequent global demand shock. The chart also highlights the intensification of supply bottlenecks in developed economies (end-users in global supply chains) in the course of 2021, when demand indicators outperformed output indicators. This indicator suggests some turnaround in these global supply-demand imbalances in late 2021, which is a function of both improving output and softening demand conditions. That also helps explaining an easing in cost price pressures visible in the latest global PMI survey. The subcomponents for input and output prices have dropped by around 5 full points since October, despite a flare-up of commodity prices (typically the key driver of these components) in late 2021.

Omicron likely to delay reduction in supply-demand imbalances.

All in all, should pandemic disturbances indeed fade in the course of this year compared to 2021, this should help contribute to a further reduction in supply-demand imbalances, with both an easing of supply side bottlenecks and a rotation of global demand back from goods to services. However, Omicron may well delay this normalisation process, both on the supply and the demand side – also see our Global Daily of yesterday¸ Omicron macro impact becoming more visible. At the same time, should Omicron not only prove more contagious but also milder than Delta, it could mean these pandemic-related disturbances ease more quickly compared to Delta.