Global Manufacturing Inching its Way from Recession

Employment levels dropped in most nations but eased sharply from recent levels. Contraction accelerated in China and Japan.

A marginal increase in input prices was cited following three months of decline. Output charges continued to fall but at the slowest pace since February, said J.P. Morgan and IHS Markit.

“June saw a further momentum shift in the global manufacturing sector after the economy started on the recovery path in May,” said Olya Borichevska, global economist at J.P. Morgan. “The output PMI increased for a second consecutive month in June rising a total of 14.5 points. We look for the PMI to continue moving higher as growth firms. This of course is premised on continued easing of activity restrictions. With demand rebounding, the focus is starting to shift to the labor market, with hopes that the current process of job retrenchment proves shallower and shorter than expected.”

Eurozone manufacturers saw business conditions improve as restrictions on economic activity were relaxed last month. The June IHS Markit Eurozone Manufacturing PMI rose to a four-month high of 47.4, but remained below 50.0 for the 17th month.

New orders and new export sales continued to fall, undermining attempts to increase production. Capacity utilization rates remained well below historical norms and backlogs fell for the 22nd month. Employment levels dropped across the region.

Purchasing activity was subdued as firms used existing inventory  when possible, resulting in declining stocks of both inputs and finished goods. Lower input costs were passed in lower output charges.

“Expectations for the year ahead have also rebounded sharply as hopes grow that the economy will continue to find its feet again in the coming months,” said IHS Markit Chief Economist Chris Williamson.

The Caixin China General Manufacturing PMI rose to 51.2 in June from 50.7 in May. Production expanded for the fourth straight month and new orders rose for the first time since January. The uptick in sales was due to stronger domestic demand as export orders continued to slide. Higher input prices were perceived as an indication of firmer market conditions as pandemic measures were eased. Recent flare-ups of infections had limited impact on the overall economy, said Dr. Wang Zhe, senior economist at Caixin Insight Group.

The IHS Markit Russia Manufacturing PMI jumped to 49.4 in June from 36.2 in May as output and new orders increased with the loosening of COVID-19 restrictions. Higher input prices were passed in higher selling prices. Pre- and post-production inventories fell as existing stocks were used to fulfill orders and backlogs. Workforce numbers dropped due to subdued demand and cost-cutting measures. IHS Markit forecasts a 7 percent decline for Russian industrial production in 2020.

Manufacturing in North America remained in contraction in June with Mexico lagging well behind the U.S. and Canada.

The Mexico PMI rose slightly to 38.6 from 38.3, but was hindered by weak demand due to coronavirus restrictions and economic uncertainty. New orders, particularly new export orders, declined steeply in June. Production was cut sharply resulting in further reductions in staffing and purchasing activity. Supply line disruption lengthened delivery times.

“The latest PMI data for the Mexican manufacturing sector suggest the country is still struggling in its fight against the coronavirus outbreak,” said IHS Markit Economist Eliot Kerr. “Production continued to decline sharply, with demand conditions subdued and many factories remaining closed. “That said, on the whole, the data was trending in the right direction, with the rates of decline for activity, new orders and employment all easing. Moreover, sentiment improved slightly despite remaining negative overall.”

Manufacturing conditions eased in Canada with output, new orders and employment slowing their rates of decline. Production volumes fell at their weakest extent as factory operations resumed. The IHS Markit Canada Manufacturing PMI climbed 7.2 points to 47.8 in June. Staffing cuts more than offset any new hires during the month.

Supply chains remained under severe pressure in June, said IHS Markit, which led to longer lead times for raw material deliveries, especially for items shipped from the U.S. Input costs rose at their fastest rate in four months and were attributed to exchange rate depreciation against the U.S. dollar, higher vendor surcharges and supply shortages. Factory gate charges increased slightly as a result.

Canadian manufacturers were mostly optimistic about future business conditions, but continued to worry about the global economic outlook.

Manufacturing in the United States crashed in April but stabilized by the end of June. The IHS Markit PMI rose 10 points to post 49.8 as businesses reopened and demand picked up. New orders halted a three-month sequence of contraction, however new export orders continued to decline.

Employment levels continued to decline but at a much weaker rate than April and May. Backlogs declined sharply indicating some excess capacity. Supply chain issues and higher shipping costs added to input costs in June that were passed on to customers in higher selling prices. Pre- and post-production inventories continued to fall as manufacturers used existing stocks to fulfill new orders.

“The record rise in the New Orders Index, coupled with low inventory holdings, bodes well for a further improvement in production momentum in July,” commented Williamson. “A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive. However, while the PMI currently points to a strong V-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again.”