Manufacdturing Getty

Global Manufacturers' Supply Chains Strain to Keep Up With Faster Economy

A slew of global purchasing managers indexes all point to deep supply constraints as this year's economy looks to be the strongest since 2011.

Factories across the globe warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices as the world economy looks set to enjoy its strongest year since 2011.

A slew of purchasing managers indexes published on Jan. 2 from China, Germany, France, Italy and the U.K. all pointed to deeper supply constraints, with a U.S. gauge to be released later on January 2. 

Shrinking capacity may mean companies have to hire or invest more to avoid overheating, yet it could also force them to push up prices, propelling inflation enough to squeeze the expansion. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among the banks predicting worldwide growth will be around 4% this year, which would be the fastest since a post-recession rebound seven years ago.

“A key development to watch out for in 2018 is the potential advent of accelerating inflation,” said Larry Hatheway, chief economist at GAM. “It matters most because it is almost entirely unanticipated by markets, yet seems likely from the perspective of macroeconomic conditions.”

In the euro area, IHS Markit said “robust intakes of new business tested capacity” and there was a jump in backlogs of work as factories found it hard to keep up. In Germany, the region’s largest economy, this “poses a risk to the sector’s ability to kick on,” it said.

Firms expressed discomfort as euro-area manufacturing growth accelerated to a record in December, capping a solid year for industry.

With export demand strengthening, Markit’s monthly report showed both new orders and output were the best in 17 years. Germany’s gauge rose to a record and France improved. Global growth also got a boost from a solid reading in China’s manufacturing sector.

With industry at its limits, there are implications for inflation in the euro region, which remains below the European Central Bank’s target of just under 2%. Bundesbank President Jens Weidmann, who wants to set an end-date for monetary stimulus, recently cited regional bottlenecks as setting the stage for stronger wage growth.

“The missing element has been sustained higher inflation,” said Chris Williamson, chief business economist at Markit. “But the near-record incidences of supply-chain delays seen toward the end of 2017 indicate that pricing power is shifting from the buyer to the seller, suggesting upward price pressures are gradually returning.”

At the same time, input costs remain “elevated” across a number of economies, partly reflecting higher raw material prices.

What Our Economists Say“Rising supply constraints across many of the world’s largest economies represent a return to normalcy for now, but if momentum continues it will ultimately become inflationary. Accelerating growth has been eating up excess capacity and once that is gone inflation will perform in a more typical fashion and accelerate.”--Mike McDonough, chief economist, Bloomberg Economics

China Growth

In China, the Caixin factory PMI rose to 51.5 in December from 50.8 in November, marking the best reading in four months. The report noted faster growth of output, total new work and export sales, as well as an increase in backlogs of work. An official PMI weakened slightly, though remained above the key 50 level that signifies expansion.

China’s overall economic growth may slow in 2018 after accelerating last year, though the government has signaled it will accept slightly weaker expansion as it deals with what it says are “critical battles” of financial stability, poverty and pollution.

Car manufacturers are among those who have ramped up supply or felt the pressure of demand. Volkswagen AG’s main passenger-car brand said last Friday that production reached a record high last year with global output of more than 6 million vehicles, while Philippe Buros, Renault SA head of sales for France, told BFM Business radio Tuesday that French orders are up too.

“The French market has grown 5 percent on average over five years,’’ he said. “It’s quite rare, so everyone’s struggling a bit to keep up” in terms of production.

In China, state-owned Kweichow Moutai Co., the world’s most valuable spirits maker, is raising the price for its signature drink for the first time in five years and implementing an average 18 percent increase across its product line.

There were signs of weakness elsewhere in Asia, with factory indexes in Indonesia, Malaysia and South Korea dipping below 50 during December.

Still, the global economy is forecast to expand 3.7% this year, slightly faster than the 3.6% pace estimated for 2017, according to the International Monetary Fund’s most recent projections. The euro area will cool slightly from 2.3% this year, but still record growth above 2%.

By Fergal O'Brien

 

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish