Guangdong’s Pearl River Delta, a business hub known as the “factory of the world”, has largely returned to normal after experiencing the chaos brought by the epidemic. But global demand for goods is falling, with 70 percent of business activity in 29 major countries and territories “contracting.” Affected by the end of the epidemic, the focus of consumption has shifted from goods to services…

Global demand for commodities is falling. According to the business sentiment index of the manufacturing industry, 70 percent of companies in 29 major countries and regions reported a contraction in their business activities. Due to the end of the COVID-19 pandemic, the focus of consumption has shifted from goods to services, while monetary tightening in advanced countries and sluggish domestic demand in China are having a negative impact. Because of the lack of demand, the lifting of supply constraints has not turned into an easterly wind. The focus will be on whether services can support the broader economy.

The Pearl River Delta region in South China’s Guangdong province, known as the “factory of the world,” has largely returned to normal after experiencing chaos caused by the COVID-19 pandemic. For example, container ships are stuck in port waiting to be unloaded. It swelled to more than 70 at its peak in March 2022, according to financial information company Refinitiv, but has only been around 20 recently.

Data from the Japan Maritime Center show that the volume of maritime container traffic from Asia to the United States has decreased by 2-3 percent year-on-year since 2023. There are voices in the industry that “although there is a sales demand, it cannot eliminate the excess inventory of retail, and it is not strong enough to require new production and transportation” (large container ship companies).

Supply chain constraints that put inflationary pressure on the world have largely been lifted. Due to changes in China’s epidemic prevention measures, economic activities have normalized, and the impact is obvious. For the manufacturing industry, it helps to improve production processes such as parts procurement. However, supply chain normalization is not being fully utilized. This is because there is insufficient actual demand.

 

Market participants pay attention to the Global Supply Chain Stress Index (GSCPI) released monthly by the Federal Reserve Bank of New York. The index is calculated on the basis of freight rates for maritime transportation and supply chain related items in the manufacturing Purchasing Managers’ Index (PMI) of major countries. On a zero scale, a positive value indicates that the supply chain is more congested and constrained than usual. A negative range indicates that the supply and demand balance in the supply chain is being disrupted due to reduced demand and fewer goods need to be transported.

The July GSCPI, released on August 4, was -0.9, below zero for six consecutive months. In May, it fell to the lowest level (-1.59) set in November 2008 right after the Lehman Brothers crisis. In 2008-2009, the United States fell into recession, while the lending capacity of financial institutions declined, and demand for durable consumer goods such as automobiles and production materials evaporated.

Due to the impact of the COVID-19 pandemic, domestic consumption has led to a surge in demand for goods. Daejin Lee, head of maritime analysis and research at S&P Global Commodity Insights, a US research firm, pointed to the current drop in demand, noting that the end of the coronavirus pandemic had “highlighted the impact of a shift in consumption patterns from goods to services such as travel”.

Some point out that central banks in advanced countries are tightening monetary policy. In the wake of the pandemic, a massive monetary easing policy was implemented, leading to soaring asset prices and excessive consumption. The current acceleration in interest rate rises has triggered a credit crunch that is shrinking demand.

Domestic demand in China has also been weaker than expected. June’s trade statistics showed that imports were lower than in the same month a year ago for four consecutive months, and also declined from the previous month. Nicolai Hieronymis, L ‘Oreal’s chief executive, said at its July earnings conference that sales in China had “still not returned to pre-pandemic levels”, acknowledging the slow recovery.

 

The lack of demand for goods has led to a downturn in global manufacturing.

The Institute for Supply Management’s U.S. manufacturing index came in at 46.4 in July, a slight improvement from the previous month but still below the 50-point line that separates expansion from contraction for nine straight months. The index has been below 50 for the longest period since the 2008 recession triggered by the financial crisis. Orders for electronics and chemicals were weak.

The July global manufacturing PMI released by S&P International has been below the neutral level of 50 for 11 consecutive months. The length of time below 50 is second only to that of the post-Lehman recession. Regionally, in 29 major countries and regions, 70% are below 50 and business activity is shrinking. Europe, in particular, was particularly depressed, with Germany, the region’s largest, at 38.8, 11.2 percentage points below the neutral level.

 

German chemical giant BASF is facing a decline in demand from major customers other than automobiles in April-June 2023. Martin Brudmiller, chairman of the executive board, said at an earnings briefing in July that “something like China saving the world [with a massive fiscal stimulus] during the financial crisis is not going to happen in the second half of this year.” Basf recently lowered its full-year 2023 guidance.

Japan’s manufacturing PMI came in at 49.6 in July, the second consecutive month below 50. As the chip shortage has been eliminated, car production has recovered somewhat, and the slowdown has been slower. Currently, the overall strong performance of listed companies in Japan is not immune to the impact of reduced external demand. Shinketsu Chemical, a manufacturer of vinyl chloride resin used in residential pipes, is expected to see its final profit decrease in fiscal year 2023 (ending March 2024) for the first time in two years.

India, one of the “global South” of emerging and developing countries, remains strong. In addition to domestic demand, it is also seeking the demand of neighboring countries such as Bangladesh. Mexico appears to be benefiting from the de-Sinification of its exporters to the US.

The locomotive of both the global economy and the US economy is the service sector. Hiring is still rising, and there is little risk of a recession anytime soon. However, if there is insufficient demand and a prolonged downturn in manufacturing, can the real economy be supported by the services sector alone? Concerns remain about a significant deterioration in the economy.