Forecasting Eye
Just over a year ago, Cebr wrote about the risk of a global recession rising to one in three for the 2019-20 period. Looking back at the topics that worried us most back then, we see that some of our predictions have come true while others haven’t materialised (yet).
We were certainly right to put the US-China trade war at the top of the list of risks. More than one year after the first tariffs came into effect a solution to the trade dispute seems as distant as ever as both parties have dug into their positions. What we did not foresee a year ago, was the damaging effect the conflict would have on global manufacturing sectors.
So far, the world economy has avoided a recession.Manufacturing sectors across the world, however, have taken a substantial hit over the past months as business confidence collapsed, investments were cancelled and trade volumes decreased.
The German manufacturing sector has been struggling since the start of 2018, initially due to problems originating in the automotive sector. Stricter emission rules and a drop in Chinese demand for German cars are still weighing heavily on the domestic car industry, which is responsible for a fifth of total industrial output in the Eurozone’s largest economy.[1] Japan is another economy that is highly dependent on its export sector and so is grappling with the more protectionist trading environment that has emerged over the past 18 months. The relatively resilient performance of France, which has been propping up the Eurozone economy, can be explained by the fact that it is much less reliant on exports of its manufactured goods.
Finally, the US manufacturing sector is sending worrying signals. According to the ISM Manufacturing PMI, the sector had its worst month since the financial crisis in September. Looking at the alternative PMI provided by IHS, the sector is still just about in growth territory. Regardless of the exact reading of the indices, there are several signs showing that the sector is under strain, such as a 0.6% monthly fall in factory goods orders in September as well as a decrease in the shipments of non-defence capital goods by the same amount.[2] According to data from the Bureau of Labor Statistics, the manufacturing sector shed jobs in September and October, though the numbers should be interpreted with care due to the strike at General Motors.
Some might want to argue that a downturn in manufacturing is a small problem, given that the services sector is by far the largest sector in most developed economies.It is, however, important to note that the manufacturing sector has deep and far-reaching links with the other sectors of the economy. Supply chains in production industries are usually much longer and complex than for the majority of businesses in the services sector. The prolonged downturn in manufacturing could, therefore, easily spill over to other parts of the economy. So far, this has not happened yet on a larger scale. Domestic economies in the US and in Germany are still strong, with low unemployment boosting consumer spending. However, there are indications that labour markets have stopped tightening. Should unemployment rise and consumer demand falter, the global manufacturing recession could quickly turn into a full-blown economic downturn.
[1] Germany Trade & Invest – The Automotive Industry in Germany
[2] https://markets.businessinsider.com/news/stocks/manufacturing-data-factory-orders-slump-more-than-expected-trade-war-2019-11-1028656446
Contact: Kay Neufeld – kneufeld@cebr.com +44 (0)20 7324 2841