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

Improvements in supply chain conditions will be offset by sluggish demand

Current dynamics in the global manufacturing sector point to an improvement in supply conditions, but a deterioration in demand. Multinationals should expect further improvements in lead times and input costs as supply chain issues ease and material availability improves. However, expectations of a downturn are weighing on order books. In turn, this lower demand is leading to a shift in pricing power from sellers to buyers. Meanwhile, the recent turmoil in the banking sector following the collapse of Silicon Valley Bank will not lead to a full-blown crisis; however, it greatly increases the likelihood of further tightening of access to loans, as banks seek to protect their balance sheets. Given the reliance of the manufacturing sector on credit, multinationals working with manufacturers should expect increased price sensitivity, demands for more flexible payment terms, and greater demand for leasing and other ways of offsetting large upfront costs and providing flexibility should demand fall short of expectations.


The increasing divergence in the outlooks of Northern and Southern Europe is apparent in March’s PMI readings, with Greece, Italy, and Spain all posting expansions, while Germany, the Netherlands, and the UK all continue to contract. The broad contraction in demand (the eleventh month in a row) is attributable to high credit costs and inflation, but also to inventory destocking. Still, the high level of backlogs in Europe’s manufacturing sector helped partially offset the fall in new orders, and thus activity remained relatively constant. The positive news out of Europe comes mostly on the cost side: average manufacturing prices registered their first month-on-month decline in almost three years thanks to lower input and energy costs, which should lead to falling inflation at the consumer level.

In the US, conditions continued to deteriorate, although at a lesser pace than in previous months, signaling an improvement in the outlook. Manufacturers were helped by shorter lead times, themselves a product of easing supply chains at the global level, as well as improved availability of inputs. This allowed manufacturers to increase output for the second month in a row, although this predominantly came from the clearing of backlogs. On the demand side, continued sluggishness in new orders points to clouds on the horizon, and we could see further contractions in output in the next several months as the impact of high inflation and tighter financial conditions continues to take a toll. Still, there is optimism as to an eventual recovery, which led manufacturers to increase employment as they prepare for the rebound in demand.

The outlook in the rest of the Americas was mixed. Canada posted a strong contraction as high input cost inflation and particularly subdued demand broke the positive streak of the past two months. In Mexico, strong demand, improving input cost inflation, and a stronger peso helped activity expand, while Brazil’s contraction deepened as economic and political uncertainty continue to weigh on sentiment.

In China, the uncertainty regarding the nature and timing of the post-Zero-COVID recovery was apparent: after a strong showing in February, the country’s PMI figure returned to the neutral figure of 50 in March. While supply conditions improved substantially, thanks to lower input costs and fewer COVID-related disruptions, the issue was on the demand side: following the reopening, consumption in China has weighed much more toward services than it has toward consumption. In turn, businesses have struggled to assess the outlook for goods demand, as exemplified by the fall in inventories.

In the rest of Asia, Japanese manufacturing continued to suffer from weak domestic and international demand. However, manufacturers there are preparing for a rebound by clearing through backlogs and building up inventories, and input price inflation, although still elevated, reached a 19-month low. India continues on its stellar trend, with output and new orders increasing at even quicker rates. Buoyed by the prospect of resilient demand, manufacturers made the most of a respite in input costs to rebuild their inventories. In ASEAN, Thailand, the Philippines, and Indonesia all enjoyed strong expansions, while Vietnam contracted substantially after a strong improvement in the prior month.

Our View

As we enter the second quarter of 2023, the picture emerging from the global manufacturing sector is a shift from a supply story to a demand story.

At a global level, supply chain issues have eased considerably, thanks to the Chinese reopening but also due to the improved availability of inputs; in March, vendor lead times showed their best improvement since 2009. In turn, this is allowing manufacturers to fulfill demand more effectively and to clear backlogs many of them have had since the early days of the pandemic. As the supply-demand imbalance for inputs eases, so does their cost: input cost inflation is at its lowest level in almost three years, and this is translating into lower factory gate prices, which will be a valuable asset in the fight against inflation at the consumer level. However, companies should monitor for the first signs of discounting, especially in segments with weak demand outlooks and significant inventory overhangs. 

The worry, however, is on the demand side. Across the world, the prospect of an economic downturn brought about by high interest rates and inflation is translating into sluggish demand. While manufacturers continue to be optimistic about longer-term prospects, they will continue to face falling order books in the near term. Much of the outlook for 2023 will depend on the recovery in Chinese consumption, which, as it stands, looks more weighted toward services, as well as the extent of the drop in consumer spending in major markets such as the US and Europe.

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