With the bulk of global manufacturing PMI indices now reported for February 2019, what is becoming very apparent is that China’s economic slowdown is having a discernable impact on other regions, perhaps far more accelerated that originally anticipated.
Overall, the J.P. Morgan Global Manufacturing PMI was reported as 50.6 in February, with overall global manufacturing declining to a 32-month low point. At time of publishing, the PMI indices for South Korea and Japan were not available to be included in the index. Both of these region reports are now published, and both had steep declines into negative territory. The Nikkei South Korea PMI was reported as 47.2, a decline of 1.1 percentage points, and that of Nikkei Japan PMI was reported as 48.9, a 0.4 percentage point decline. Thus, the February global production number is likely lower.
According to the report narrative, global operating conditions improved in consumer and investment goods sectors but deteriorated in intermediate goods sectors. That is usually a reflection of global supply network activity levels slowing. Further noted: “The trend in international trade remained lackluster in February, as new export business contracted for the sixth straight month.” Additionally noted was that:
“Business optimism has fallen to its second-lowest level in the series history during February. Confidence eased (on average) to its weakest in six years in developed nations and to a two-month low in emerging markets.”
Among Developed regions, the Markit Eurozone PMI slipped into contraction territory with a value of 49.3, the first downturn since 2013. The contraction was led by Germany, Italy and Spain, all of which had indices below 50. Germany’s February manufacturing activity reportedly dropped to its lowest level since 2012, driven by uncertainty related to U.S.-China trade tensions and weakness across that country’s significant auto sector. Taiwan continued was its manufacturing deceleration with a February value of 46.3, a three-and-a-half year low. The ISM Report on Business for February surprised many with a value of 54.2, a decrease of 2.4 percentage points from the January number. That number represented the lowest level in more than two years with declines in new orders, production and employment contributing to decreased momentum.
From our Supply Chain Matters lens, indicators of China’s production and supply chain management activity were somewhat suspect.
The Caixen China Generating Manufacturing PMI which has a primary focus on mid-market enterprises was reported as 49.9, representing a 1.6 percentage point increase from January’s value. That is despite February’s celebration of the Lunar New Year where many manufacturers shutdown for upwards of 7-10 days. According to the authors, data pointed to a significant upturn in domestic demand as new export orders fell marginally. Our suspicion, lacking quantitative data, is that the February number reflects a surge in shipments to the U.S. before the previously scheduled March 1st date for increases in U.S. import tariffs. That deadline has subsequently been lifted by the Trump Administration based on positive impressions of ongoing trade talks. The official government PMI which is more weighted to state-owned and larger industries, fell to its lowest level in three years with a February value of 49.2, and 0.3 percentage point decline from January. A sub-index for production activity dropped below the 50 level for the first time since January 2009.
Among other Emerging regions, indices for India, Indonesia and Mexico each increased in February. The Nikkei Vietnam PMI index declined 0.7 percentage points from January’s level. According to the report authors, international demand weakness held back overall activity while reductions in manufacturing employment and stocks of purchases further contributed to declines.
Supply Chain Matters Perspectives
Entering this year, the consensus of 2019 economic forecasts called for an optimistic but cautious outlook for global growth, but with meaningful downside risks. Among such risks were growing trade tensions and weaker investment globally. OECD data had indicated that manufacturing new export orders had been decelerating since the middle of 2018., as was global ocean container port traffic.
Two months intro 2019, such trending appears to be more pronounced. The fate of Brexit continues to remain uncertain and as noted in a prior commentary, supply network teams cannot rest easy after reported pauses in trade deadlines.
Concerns are rising relative to the overall economic impact of lost exports. Bloomberg has reported that Chinese retaliation against U.S. import tariffs are costing the U.S, economy upwards of $40 billion annually in lost exports. Likewise, other regions such as Europe are now experiencing similar or broader impacts, While other regions are garnering some of the advantages as an alternative source of products, overall global slowdown seems rather discernable.
Our view remains cautious primarily because we continue to sense the beginnings of structural global supply and demand network changes occurring.
Our counsel to global supply chain and sales and operations planning teams is to continue to play close attention to global activity trending and local market indicators. Some of you have likely already begun to exercise global and regional supply sourcing changes while others are taking more frequent pulses of overall product demand and supply trending.
The operative word remains diligence, detail, and a lot of scenario-based analysis.
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