Factory output is faltering in a number of key economies, darkening the outlook for the global economy and increasing the likelihood that leading central banks will respond with fresh stimulus.
Global industrial production has been weakening since the start of 2018. Economists are divided on whether the factory slowdown is largely a consequence of disruptions to trade and investment as a result of higher tariffs and uncertainty about where they will settle, or a more short-lived pause after a long expansion and some setbacks in particular sectors, such as automobiles.
Europe has suffered the sharpest downswing, and there is little relief in sight, according to a June survey of purchasing managers conducted by data firm IHS Markit that was released Friday.
The Purchasing Managers Index for the manufacturing sector rose to 47.8 from 47.7 in May, but a reading below 50.0 still points to a decline in activity. Readings for the three months of the second quarter point to the sharpest fall in activity for six years.
A similar survey of Japanese manufacturers also published Friday found that activity was at its weakest in three years, while a decline in new orders suggested a significant pickup is unlikely over coming months.
What worries policy makers at central banks is that the longer the factory slowdown lasts, and the more widespread it is, the more likely it is that other parts of the economy will be affected.
“The first quarter of 2019 was as difficult as we had expected,” German chemical company BASF SE’s finance chief, Hans-Ulrich Engel, said. “Global economic growth continued to be negatively impacted by geopolitical developments and the ongoing trade conflict between the United States and its trading partners.”
European manufacturers expect the tough times to continue, citing a range of headwinds that include Brexit and the impact of the trade dispute on Chinese demand for Europe’s exports.
“Conditions will remain volatile,” said Nicolas Peter, chief financial officer at German auto maker BMW AG, on the company’s first-quarter earnings call. “For one thing, there is a lingering uncertainty over the future course of trade policies and the U.K.’s withdrawal from the European Union. We will also continue to monitor economic developments world-wide very closely.”
European auto makers still face the threat of fresh U.S. tariffs, with President Trump yet to decide how to respond to a Department of Commerce finding that imports are a threat to national security.
Sectors that sell to automobiles makers — such as chemicals — have also stumbled. But the slowdown is more widespread. General Electric Co., which bought Alstom SA’s energy business in 2015, said in May that it aims to slash up to 1,044 jobs in France in the face of falling orders world-wide.
For Japan, cooling demand from China has proved one of the strongest headwinds. The government said Wednesday that exports fell 7.8% in May, including a 9.7% drop in exports to China. While China has usually been the top market for Japan in recent years, it has fallen in recent months to No. 2 behind the U.S., reflecting lower demand by Chinese factories for Japanese parts and machinery.
Shares of parts makers with customers in China have fallen in line with the rise of trade tensions. Shares in Murata Manufacturing Co., which makes tiny ceramic parts used in smartphones and other devices, are down more than 20% from their recent peak in April after the company forecast a fall in profit in the current fiscal year.
The reversal in the manufacturing sector’s fortunes has been key to a change of view at the European Central Bank, which remained optimistic enough about the currency area’s prospects to end its bond-buying program in December. Last week, it said it may resume those purchases and cut its already-negative interest rate, citing feeble factories as a key worry.
The Federal Reserve shares those concerns, and Wednesday signaled it may cut its key interest rate over coming months if there are no signs of improvement.
“We’re seeing this all around the world,” Fed Chairman Jerome Powell said. “Manufacturing, investment and trade have been weaker.”
For now, however, there aren’t clear signs that the rest of the global economy is being dragged down by faltering factories. In the eurozone, the PMI for the services sector rose to 53.4 from 52.9 in May, hitting a seven-month high as low unemployment rates and accelerating wages helped support consumer spending.
Source: Dow Jones