Global Manufacturing Starts Year Robust Despite Supply Chain Disruptions

Vendor times lengthened markedly in January and supply chain disruptions and shortages contributed to pricing inflation. Sentiment regarding future production was positive, but overall optimism dropped to a three-month low.

The Eurozone saw solid growth in new orders during January putting additional pressure on backlogs. Manufacturing in the region expanded for the seventh straight month, although softening to a PMI reading of 54.8 from December’s 55.2. Expansion was greatest in countries with strong export bases, such as the Netherlands and Germany. Production grew for a seventh month but at a weaker pace. Supply-side shortages pushed input prices higher and were passed on in selling prices. Inventory declined due to supply shortages and finished inventory dropped on destocking. Confidence rose to a three-year high on hopes that the vaccine will boost economic activity.

“At the moment, manufacturing is providing an important support to the economy as the service sector is hit by COVID-19 restrictions, but this support is waning,” said Chris Williamson, chief business economist at IHS Markit. “Consumer goods producers in particular are struggling. While future prospects brightened, with manufacturers’ optimism striking a three-year high in January to sound a reassuring note of confidence at the start of the year, any potential delays to the vaccine roll-outs will add an additional layer of uncertainty to the outlook.

“Supply shortages have meanwhile put pricing power in the hands of suppliers, pushing raw material prices sharply higher. Increased shipping costs are adding to the burden. These price pressures should ease once more supply capacity comes online, although there remains some uncertainty about how much pent-up demand exists and how sticky these higher prices may prove to be.”

The Caixin China General Manufacturing PMI fell to 51.5 in January from 53.0 in December, losing momentum from its decade high in November. “Overall, the manufacturing sector continued to recover in January, but the momentum of both supply and demand weakened, dragged by subdued overseas demand,” said Dr. Wang Zhe, senior economist at Caixin Insight Group. “The gauge for future output expectations was the lowest since May last year, though it remained in positive territory, showing manufacturing entrepreneurs were still worried about the sustainability of the economic recovery. In addition, the weakening job market and the sharp increase in inflationary pressure should not be ignored. This year, we should pay attention to the effectiveness of domestic epidemic prevention amid the ongoing pandemic and look at how to bring new momentum to the Chinese economy as uncertainties over overseas demand continue.”

The IHS Markit Russia Manufacturing PMI crossed back into expansion territory at 50.9, after five months in contraction. Growth was marginal but resumed for both output and new orders. Backlogs fell as employment levels rose. Supplier delivery times lengthened, creating cost pressures that were passed on in higher charges to clients. Both raw and finished inventories fell in January. Business confidence remained optimistic, although down slightly from December, as firms looked forward to an end to the pandemic.

Manufacturing expanded in Canada in January, but eased as COVID-19 restrictions continued. The PMI dipped to 54.4 from 57.9 in December as production and new orders softened. New order growth was partially in response to higher demand for Personal Protection Equipment and other virus-related products. Exports were flat as foreign market demand remained muted. Supply-chain disruptions from border restrictions and port congestion were blamed for deteriorating vendor performance and higher backlogs. Inventories of inputs and finished goods declined due to uncertain demand and efforts to control cash flows. Firms reported higher prices for aluminum, steel and transportation. “Nevertheless, firms remained optimistic that output in the year ahead will improve, although the longer-term impact of COVID-19 weighed slightly on the degree of optimism,” said IHS Markit.

The pandemic continued to take its toll on manufacturing in Mexico in January. New orders, production and employment fell sharply and at record rates. The manufacturing PMI was well below the neutral 50-mark at 43.0, although up slightly from 42.4 in December. As sales fell and business shutdowns rose, production and employment were scaled back, said IHS Markit. Despite rising input costs, firms tried to attract sales by lowering prices for the 15th consecutive month. “Whereas manufacturers on average remained optimistic towards growth prospects, confidence remained subdued and even weakened in January due to downbeat assessments among some firms,” said Pollyanna De Lima, Economics Associate Director at IHS Markit.

The IHS Markit U.S. Manufacturing PMI reached a record high of 59.2 in January as both new orders and production growth rose at their fastest rates in more than six years. Easing of coronavirus restrictions allowed projects to restart, boosting sales in January. New export orders rose at the fastest pace since September 2014. Supply shortages and transportation issues, particularly in trucking, resulted in a sharp increase in input costs that were in turn passed on in output charges. Lead times continued to lengthen resulting in accelerated purchasing activity to replenish raw material inventories. Finished good inventories were depleted as demand outpaced production. Manufacturer confidence remained high with firms hoping for increased demand and less uncertainty as the vaccine is rolled out.

Commented Williamson: “Manufacturers are encountering major supply problems, however, especially in relation to sourcing inputs from overseas due to a lack of shipping capacity. Lead times are lengthening to an extent not previously seen in the survey’s history, meaning costs are rising as firms struggle to source sufficient quantities of inputs to meet production needs. These higher costs are being passed on to customers in the form of higher prices, which rose in January at the fastest rate since 2008. These price pressures should ease assuming supply conditions start to improve soon, but could result in some near-term uplift to consumer goods price inflation.”