global manufacturing - High energy and input costs are driving steep production declines in Europe and South Korea and stagnation in the US and Japan

Weak demand is driving a deceleration in input cost and selling price inflation, as business confidence falls to the lowest since May 2020

As global manufacturing activity recedes, firms serving the sector should concentrate efforts on riding sequential “waves” of demand over the coming months. Slowdowns in Europe and China will be partially offset by resilient demand in the Americas, the Middle East, and parts of Asia. Firms can concentrate their targets and sales efforts in these regions in the short to medium term, while preparing their operations for an eventual recovery in Europe and China, which likely won’t begin until mid-2023. Additionally, they can approach order management under the general assumption that input cost pressures will continue to ease, although price levels will remain well above the pre-pandemic norm—especially for energy costs and in Europe.


Global manufacturing performance sank further in July to its worst in two years, according to surveys of purchasing managers. Overall manufacturing output stagnated, with steep declines in Europe offset by expansion in a handful of markets, including India, Australia, Brazil, and ASEAN. China’s output expanded modestly as the manufacturing sector continued to recover from strict lockdowns in April and May, but the pace of growth was exceptionally weak. Even in resilient markets, production grew at one of the weakest rates since the early 2020 pandemic lockdowns.

The deterioration in output and new order growth was also reflected in hiring and business confidence. Although staffing levels rose overall, the pace of hiring eased. Interestingly, payrolls expanded in the US, euro area, and Japan despite weak-to-negative production growth, while staffing levels fell in China despite a modest expansion. Globally, business confidence fell to its lowest level since May 2020.

Although input costs and selling prices rose, the rate of inflation eased to 17-month lows. Producer price inflation remains high in Europe despite weakening demand, mostly driven by rising energy prices. Elsewhere, weakening demand is helping to ease cost pressures and reduce supply chain snags, as evidenced by shortening delivery times.

Our View

In May, we anticipated an imminent global manufacturing contraction driven by unprecedented cost pressures and supply chain challenges along with weakening Chinese activity. That downturn is now underway and is likely to get worse before it gets better. Cost pressures and supply chain snags are showing signs of easing, but the improvement is driven almost entirely by weakening demand rather than capacity expansion on the supply side. In other words, price increases are moderating because of a leftward shift in the demand curve, which entails a decline in the quantity of manufactured goods being produced. China’s manufacturing sector remains very weak despite an end to severe lockdowns, suggesting medium-term headwinds to growth. Overall, global manufacturing activity is likely to weaken further in the next quarter.

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