Global Manufacturing Health Sapped by Virus

Written by Sandy Williams

In just a few weeks from the first known case, the COVID-19 outbreak has wreaked havoc on the global manufacturing sector. The J.P. Morgan Global Manufacturing PMI posted a steep decline in February, falling to 47.2 from 50.4 in January, its lowest level since May 2009.

New orders and production fell at record rates in China and 15 of the 32 nations surveyed in February reported a contraction in output. The U.S., United Kingdom, Canada, Mexico, India and Brazil were among the few larger countries to report output growth. Output fell across consumer, intermediate and investment goods, said J.P. Morgan, with the latter showing the deepest decline.

International trade contracted markedly in February as the virus outbreak impacted supply chains and demand. Average vendor lead times were at their longest in almost nine years and delivery delays resulted in declining stocks of inputs and finished goods.

Input prices were higher in February while output charges declined for the first time in four months. Employment levels in the manufacturing sector declined for the third month in a row and at the fastest rate since August 2009.

“Business confidence was little-changed from January’s 17-month high, as lower optimism (on average) in developed nations was offset by a mild improvement in emerging markets,” said J.P. Morgan.

The Caixin China General Manufacturing PMI plummeted to 40.3 in February after posting 51.1 in January. Quarantines and travel restrictions caused many firms to shut down or operate at below capacity. Output, new orders and purchasing activity declined at the steepest rate since the survey began in 2004. Vendor delays left firms struggling to find inputs. A steep drop in employment levels due to the COVID-19 restrictions caused pressure on capacity and resulted in rising backlogs.

“This month’s gauge hit the lowest level since the survey launched in early 2004. The sharp decline was due to stagnant economic activity across the country disrupted by the pneumonia epidemic caused by the novel coronavirus,” commented Dr. Zhengsheng Zhong, chairman and chief economist at CEBM Group.

“China’s manufacturing economy was impacted by the epidemic last month. The supply and demand sides both weakened, supply chains became stagnant, and there was a big backlog of previous orders. However, manufacturers were more confident. The economy will be able to see a significant rebound when the epidemic is gradually contained and companies accelerate the resumption of business amid more proactive fiscal and monetary policies.”

In the Eurozone, manufacturing conditions remained in contraction at 49.2 but rose 2.7 points from January. The PMI has been below the 50 mark for 13 consecutive months, but has now had two increases in a row. The region saw a deterioration in vendor times due to supply disruption from China. The delay in input deliveries caused inventories of raw materials and finished goods to drop significantly. Input price reduction slowed in February. Firms were forced to cut output charges due to underwhelming sales and competitive pressure.

“Despite widespread reports from companies that the coronavirus outbreak disrupted supply chains and hit foreign sales, resulting in considerably longer lead times and a steepening drop in export orders, February saw encouraging signs that the eurozone’s manufacturing downturn is easing,” said Chris Williamson, chief business economist at IHS Markit. “Production contracted at the slowest rate for nearly a year and, despite lost export sales, new orders fell at the weakest rate for 15 months amid signs of rising internal demand, notably from consumers.”

Continued Williams, “The concern is that coronavirus-related delays in shipments threaten to constrain production in the coming months, prolonging a downturn that already extends to over a year. Supply chains are lengthening to an extent not seen since 2018 and inventories are being depleted at a rate rarely seen over the past decade as companies struggle to produce enough to satisfy order books.”

Russia has also been hit with supply chain issues due the coronavirus. The manufacturing PMI remained in contraction but rose from 47.9 in January to 48.2 in February. Weak demand continued to impact production and new orders but at a slower rate. Optimism was at a two-year low as softer demand increased competition for clients.

The IHS Markit Mexico Manufacturing PMI rose to 50.0 after deteriorating for three consecutive months, providing some hope that a recovery is on the way. Manufacturers in Mexico saw an increase in production for the first time in nine months along with marginal increases in orders at home and abroad. Purchasing activity increased slightly in February, but inventories of raw materials and semi-finished goods continued to decline during the month. Headcounts were still down and attributed to restructuring, downsizing and non-replacement of departing staff for lower employment levels. Optimism was at the second lowest level in eight years as employment fell and firms expressed concern over lack of investment and market uncertainty.

Business conditions in Canada improved in February as new orders and export orders picked up. Production increased for the sixth month as orders rose at their fastest rate since October 2019. The IHS Markit Canada Manufacturing PMI gained 1.2 points to post at 51.8. Supplier lead times lengthened to their longest extent in 12 months and firms noted rail transport delays and supply issues for items sourced from China. Purchasing activity declined for a third month as manufacturers worked down pre-production inventories. Both input prices and factory gate charges increased in February.

Manufacturing in the United States lost momentum in February, growing at the slowest rate in six months. The IHS Markit U.S. Manufacturing PMI dipped to 50.7 from 51.9 in January. Output growth weakened despite higher new order volumes with some firms reporting supply issues following the outbreak of the virus in China. Shortage of inputs resulted in longer backlogs and a drop in pre-production inventories.

“Manufacturing production and order book trends deteriorated markedly in February as producers struggled against the double headwinds of falling export sales and supply chain delays, both in turn often linked to the coronavirus outbreak,” said Williamson. “Any growth in sales was once again largely driven by domestic consumers, though even here the rate of growth was weakened considerably compared to late last year. Historical comparisons against official data indicate that the survey is consistent with factory production and orders both falling at annualized rates of around 3 percent, with manufacturing jobs being lost at a monthly rate of roughly 20,000.

“While trade war fears have eased, helping push firms’ expectations for future growth to the highest since last April, coronavirus-related supply chain issues threaten to constrain production in coming months. At the same time, companies have become increasingly concerned that the COVID-19 outbreak will also hit demand, which is reportedly already cooling amid uncertainty leading up to the presidential election. Recent stock market volatility could also further dampen consumer spending and deter business investment.”

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