What the manufacturing downturn means for investors and the economy
After a post-Covid boom, manufacturing around the world is slowing down, which is affecting the global economy.
Manufacturing took a hit during the initial stages of the pandemic in 2020 but rebounded quickly in 2021 thanks to massive monetary and fiscal stimulus. However, as monetary policy tightened over 2022-23, conditions weakened, and activity is now contracting.
Until now, demand for services has helped to balance out the weakness in manufacturing but this is expected to slow due to rising interest rates and unemployment. As a result, global growth is predicted to be lower in 2024.
Ups and downs
Historically, manufacturing has gone through cycles that last around 18 months. Manufacturing Purchasing Managers’ Indices (PMIs) peaked in mid-2021 and have been declining since, with forward-looking indicators suggesting further weakness to come as consumer spending slows down.
PMIs are surveys conducted across large global companies in manufacturing and services industries. They provide monthly updates on forward-looking measures like orders, prices, employment and inventories.
A varied picture
The outlook varies across the manufacturing industry, with textiles, clothing, footwear, plastics, furniture, household goods and vehicles expected to face challenges. Machinery and equipment manufacturing are likely to do better due to demand for tech goods.
And different countries have been affected in different ways, with China, South Korea, Japan and Germany among the most exposed to manufacturing.
China’s post-Covid rebound has been softer than expected, while Germany has entered a mild technical recession. Meanwhile, Japan’s growth has been solid, supported by low interest rate settings by the Bank of Japan.
Other countries are also heavily reliant on global manufacturing as many industries have input into the manufacturing process. In general, developed markets such as Europe and the US look worse than emerging markets, with conditions holding up in the Middle East, India and Indonesia.
Overall, global growth is expected to be around 2.7% this year, below the historical average of around 3%. Growth in 2024 is expected to be even weaker at around 2.3%, as services activity slows.
And there could be more storm clouds on the horizon for global trade, as disputes over semiconductors continue between the US and China.
What this means for share prices
The impact on share markets has been mixed. The broad weakness in the Chinese economy has led to poor performance in local shares, while investors have looked beyond Germany’s technical recession to deliver solid growth in shares. Meanwhile in Japan, share markets have been tracking around their highest levels since 1989.
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Current as at Jul 2023
Source: Econosights: The global manufacturing downturn, AMP Chief Economist Diana Mousina, https://www.amp.com.au/insights-hub/blog/investing/econosights-global-manufacturing-downturn
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