Near-term manufacturing trends, by country (September PMI data)

Two-thirds of major markets experience a contraction in output

The downturn in manufacturing is the earliest sign of an impending global recession, which continues to be our base case. Manufacturers and industrial/B2B firms should prepare for a recovery in activity in late 2023, but delay their assumptions of a full recovery for China until at least 2024. In the meantime, they can direct their focus to pockets of resilience, including India, Southeast Asia, Middle East oil exporters, parts of Latin America, and—to a lesser extent—the US.


The global manufacturing sector contracted further in September, continuing a downturn that began in July. Production fell at the fastest rate since April, when strict lockdowns in China disrupted global manufacturing activity. Outside of the pandemic era, the drop was the steepest since 2012. Two-thirds of major markets are now experiencing a contraction, including China, Japan, South Korea, the Euro area, and the UK. The decline was partially offset by expansions in the US, Brazil, India, ASEAN, and Australia. Consistent with a worsening outlook, new orders and export business likewise declined. Manufacturers in Europe are under pressure from rising energy prices, as well as sluggish domestic and international orders stemming from tougher economic conditions and heightened uncertainty. Despite a slight uptick, US manufacturing activity remains subdued due to slowing growth and labor shortages that impede firms’ ability to fulfill orders.

In Asia, manufacturers are experiencing diverging dynamics. China is dealing with operational difficulties due to strict and unpredictable lockdowns, which have led to weaker demand and a slowdown in output. In Taiwan, manufacturers are reeling from falling global semiconductor demand, while a weaker yen is adding to input cost pressures in Japan. On the other hand, Southeast Asian countries (particularly Thailand and Indonesia) and India continue to see sustained, high, and increasing levels of output growth.

Our View

In August, we spoke of a rapidly deteriorating outlook for the global manufacturing sector; the first sub-50 PMI figure in over two years indicates that this is now materializing. The trend of declining activity will continue in Q4 and into 2023, as shown by expectations for future output, which are at their lowest since May 2020. 

A significant development since our last analysis has been the update to our base case for China, which now forecasts that the country will likely not end its zero-COVID strategy before the end of 2023. As a result, business confidence will remain weak, and the country’s manufacturing sector will continue to face fluctuations in output due to factory closures, operational difficulties, and weaker demand. While major manufacturing hubs globally will all feel the pinch of weaker order books, those in Europe will face the additional pressure of high energy costs heading into the winter, as well as the prospect of energy rationing. 

A silver lining to this otherwise gloomy global manufacturing outlook is that weaker demand will likely translate into less intense cost pressures for manufacturers. Paired with easing supply chain snarls, this should translate into lower end-product inflation further down the supply chain in 2023.

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