Trade Issues Impact Global Manufacturing in June

Written by Sandy Williams

Global manufacturing is losing its momentum, said JP Morgan and IHS Markit in their latest Global Manufacturing PMI. The June PMI was at an 11-month low of 53.0 in June, still in expansion territory but at a gentler pace.

Production grew at its slowest pace since July 2017 and new orders were at a 19-month low. IHS Markit attributed “subdued international trade flows” to the decline in the new orders index. Exports increased modestly in developed markets, but emerging nations saw a third month of decline.

Prices for input and output charges rose at a quicker pace in June with rates of inflation higher (on average) in developed nations than emerging markets.

Manufacturers in the Eurozone saw business conditions continue to weaken in June. The pace of expansion has been slowing since the beginning of the year with June’s PMI registering 54.9, down from 55.5 in May. Five of the eight nations covered by the Eurozone survey recorded lower PMI readings for the month. Both production and new order growth have been sliding during the first half of 2018.

Manufacturers reported higher prices for oil and fuel and longer supply times. Backlogs of work eased somewhat from higher employment levels and weaker order books.

“Eurozone manufacturing reported its weakest expansion for one-and-a-half years in June, with risks clearly tilted towards output growth waning further in coming months,” commented Chris Williamson, Chief Business Economist at IHS Markit.

“The biggest concern is the extent to which export order book growth has cooled since the start of the year, and could soon go into decline,” said Williamson. “The survey reveals mounting worries from companies relating to the impact of tariffs and trade wars, suggesting firms are bracing themselves for the potential for further export losses. Not surprisingly, business expectations for future production deteriorated in June to the lowest since November 2015.”

Williamson added that political uncertainty, especially in Italy, was dulling optimism in June.

The Caixin China General Manufacturing PMI inched down from 51.1 in May to 51.0 in June. Output and new orders rose moderately in June, consistent with growth during the past two months. Export sales fell to a new low for the year as the trade dispute between the U.S. and China escalated. Prices jumped for raw material, such as steel, resulting in higher output charges. Sentiment was still positive for future production growth, but at its lowest level for the year.

The IHS Markit Russia Manufacturing PMI fell to 49.5 in June from 49.8 in May, signaling a second month of deterioration. New orders fell for the first time since July 2016 and production growth was marginal. Capacity utilization was down along with employment levels and shorter backlogs. Higher input prices drove a sharp rise in output charges, said IHS Market.

Manufacturing conditions in the NAFTA region were healthy in June. Mexico production jumped, after contracting in May, due to stronger domestic and international demand. A weaker currency helped to boost export sales, but caused input costs and factory gate charges to climb. Input buying increased as manufacturers built up inventory to meet production requirements and growth strategies. The PMI rose to 52.1 in June from 51.0 in May.

Canada posted its highest PMI reading in over seven years, jumping to 57.1 from 56.2 in May. New orders and production rose sharply on greater demand from both domestic and export markets (particularly the U.S.). Lead times were at record lengths and transportation delays and stock shortages were reported. Higher prices were reported for steel and aluminum. “Manufacturers also suggested that part of the rise in new work reflected efforts by clients to complete orders and boost their inventories in advance of surcharges on steel and aluminum,” wrote Tim Moore, Associate Director of surveys for IHS Markit.

IHS Markit reported that manufacturing growth in the United States was solid but softer in June. The IHS Markit U.S. Manufacturing PMI dipped to 55.4 in June from 56.4 in May. Growth was strong in both production and new orders, but at a somewhat slower pace. Foreign demand dropped off slightly after recent tariff announcements, said IHS Markit. Supply shortages added to longer lead times. Global demand for inputs kept input cost inflation high and increased factory gate prices. Jobs were added to keep up with increasing backlogs.

“The PMI for June rounds off the best quarter for manufacturing for almost four years, but also fires some warning shots about what lies ahead,” said Chris Williamson. “As such, the second quarter could represent a peak in the production cycle.”

“On the downside, new order inflows were the weakest for seven months, with rising domestic demand countered by a drop in export sales for the first time since July of last year. Business optimism about the year ahead also fell to the lowest since January, with survey respondents worried in particular about the potential impact of trade wars and tariffs.

“Tariffs were widely blamed on a further marked rise in input costs, and also linked to worsening supply chain delays, which hit the highest on record, exacerbating existing tight supply conditions.”

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