Global Manufacturers Strain to Keep Up with Faster Economy
January 4, 2018According to an IndustryWeek article.
Amid a slew of Purchasing Managers Indexes from China, Germany, France, Italy and the U.K. that all point to deeper supply constraints, the U.S. reading has reached its highest point since March 2015.
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 Tuesday from countries including China, Germany, France, Canada and the U.K. all pointed to deeper supply constraints. The U.S. reading from IHS Markit rose for the third month in the past four, reaching the highest since March 2015 amid “increased capacity pressures.”
Such strains on potential output 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. JPMorgan Chase & Co. is among the banks predicting global growth will be around 4% this year and on Tuesday said its composite of PMI reports from around the world had reached the highest since February 2011.
“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.”
Government bonds fell around the world as traders moved to price in the prospect of quickening inflation. The yield on 10-year Treasury notes increased four basis points to 2.45% while the 10-year break-even rate, a gauge of the outlook for consumer prices over the coming decade, approached 2 percentage points for the first time since March. In Europe, the five-year, five-year inflation swap rate increased to the highest level since February.
In the U.S., the IHS Markit PMI rose to 55.1 from 53.9 in November, while the euro-area index was at a record 60.6.
The report said, “robust intakes of new business tested capacity” in the euro area 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.”
The euro-zone report showed both new orders and output were the best in 17 years as exports gained. Germany’s gauge rose to a record and France improved. Canada reached a three-month high of 54.7 on stronger new orders. 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.”
The U.S. Federal Reserve raised interest rates three times last year and, according to officials’ median forecast, has penciled in another three this year on the expectation that inflation will move back toward its 2% target.
“The combination of strengthening growth, a solid labor market and rising prices will add to expectations that the Fed will remain on track for another rate hike in the near future, with March looking a likely possibility,” Williamson said.
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
In China, the Caixin factory PMI rose to a four-month high and there was faster growth of output, total new work and export sales, as well as an increase in backlogs. An official PMI weakened slightly, though remained above the key 50 level that signifies expansion.
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% 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% 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%, according to a Bloomberg survey of economists last month.
By Fergal O'Brien, with assistance from Andre Tartar, Mark Evans, Harumi Ichikura, Jill Ward, Francois de Beaupuy and Christoph Rauwald.