The chill is on. Factories worldwide are reporting plunging demand for a range of products. Central bankers and policymakers had their collective fingers crossed for a more palatable outcome, but the demand boom that ignited the post-pandemic recovery appears to be reversing course. Price increases and interest rate hikes are producing an adverse spending effect. Manufacturer surveys from the US to Italy to South Korea are all reporting the same – new orders are down big.
A curious observation is even in places like the Eurozone (where interest rates have not risen yet), demand is still down. This could benefit the zone’s central bankers as pressures to hike rates might remain low. Long-term, however, higher rates coupled with lowering demand would surely lead firms to lay off employees resulting in a likely recession. Prevailing experts agree that global supply and demand are far from balanced. Inflation will subside if a balancing act can be found.
Eurozone factory output hit its weakest level since August 2020. US output was no better, as expectations for future output plummeted to its lowest level in roughly two years. Fed Chairman Jerome Powell was in Portugal in late June/early July and did not mince words when warning that policymakers will need to cool consumption so supply has a chance of catching up. Another variable that is muddying the waters is exports from Asia.
South Korea, for example, slowed sharply in June, and Vietnam registered two months (May and June) of export declines. Taiwan, a major IT export powerhouse, tumbled in June, reporting its biggest export drop in two years. China, on the other hand, expanded its factory activity for the first time in three months, but the bulk of that is due to the easing of Shanghai lockdowns. While production was up, overseas demand continued to be weak.
On the consumer electronics front, the news wasn’t much better. Japan’s Ryohin Keikaku Company, the owner of the highly successful Muji stores, slashed its full-year profit guidance. Excess inventory was the root cause leading to heavy discounting. Semiconductor Manufacturing International Corporation out of China issued a dire warning in May that demand for home appliances and consumer electronics was dropping precipitously and not likely to improve over the coming months.
On the shipping side, the cost of shipping a 40–foot container from China to the US West Coast had dropped 15% from June 29th, and was 14% lower compared to a year earlier. This is a clear sign of weakening demand and Russia’s invasion of Ukraine has simultaneously pushed food and energy prices even higher.
Economists see a light at the end of the tunnel come early 2023. While a recession is expected State-side, some feel Europe will narrowly avoid one. Buckle up for a trying second half of 2022.
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