Manufacturing sector set for further pain, economist warns
The outlook for the manufacturing sector in the near term looks weak is likely to weigh on global growth, says AMP.
Forward looking indicators for manufacturing activity suggest that more downside for the sector is likely, says AMP deputy chief economist Diana Mousina.
Services spending is expected to slow due to the rise in interest rates and the anticipated lift in the unemployment rate, said Ms Mousina in a recent Econosights article.
Global growth is also expected to be lower in 2024 compared to 2023.
“Global manufacturing took a hit during the initial stages of the pandemic in 2020 but thanks to massive monetary and fiscal stimulus which led to a fast rebound in goods demand, manufacturing had a very fast turn rebound in 2021 which lifted global growth,” said Ms Mousina.
“The slowing in global growth over 2022-23 as monetary policy was tightened resulted in a weakening in manufacturing conditions and activity is now contracting but are not consistent with historical recessionary-like conditions.”
Purchasing Managers Indices are now at 48.8 which suggests that activity is contracting in the sector
“The sub-components of the PMIs indicate further weakness in new orders, a decline in inventories, a large improvement in supplier delivery times and employment still holding up, which shows some further downside in manufacturing activity from here, which will weigh on global growth,” said Ms Mousina.
Manufacturing tends to go through 18-month up and down cycles, she said, which suggests that the sector may be close to the end of the down-cycle given the peak in manufacturing PMIs was in mid-2021.
“However, the forward-looking indicators of manufacturing demand suggest that there is further weakness to come, especially as consumers spending has further to slow,” she said.
“So perhaps the pandemic has resulted in some disruption to the usual ups and downs in the manufacturing cycle. Services PMIs were rising in early 2023 but have started to hook down and are likely to weaken further as consumers slow spending on services.”
Manufacturing downturn having varied impact across countries and industries
The impact of the manufacturing downturn has been unequal across manufacturing-intensive economies, according to AMP.
“The Chinese post-Covid growth rebound has been softer than expected in manufacturing but also more broadly across the economy, including in the property market,” said Mousina.
“Germany was in a technical recession from December to March and has seen a rise in its unemployment rate from 5 per cent in May 2022 to 5.7 per cent in June 2023.”
Despite Japan’s high dependence on manufacturing, growth has been solid, she said, which also reflects the low interest rate settings by the Bank of Japan which is helping to support the economy.
“While the US reliance on manufacturing as a share of the economy is moderate and lower compared to the global average, it is still likely to weigh on growth over coming months and manufacturing job openings have fallen by more compared to total job openings.”
Developed market manufacturing conditions are also looking worse compared to emerging markets, driven by poor outcomes in Europe and the US.
The outcomes of the downturn will also be varied across the sector itself, according to AMP.
“Expected further slowing of consumer demand for goods means a poor outlook for textiles, clothing, footwear, plastics manufacturing , furniture, household goods and vehicles,” said Ms Mousina.
“However, machinery and equipment manufacturing are likely to do better, given demand for tech goods.”
Impact on global growth
The impact of weak manufacturing conditions on global growth has been offset by strong services activity so far.
“We expect global growth to be around 2.7 per cent this year which is below historical average growth of around 3 per cent. But growth in 2024 is expected to be even weaker, at around 2.3 per cent as services activity slows from the lagged impact of rising interest rates with the high risk of a recession in the US, UK, New Zealand and Australia,” said Ms Mousina.
“The outlook for manufacturing also remains challenging in the high interest rate environment which is confirmed in forward-looking indicators like manufacturing new orders which look very poor.”
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