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Global manufacturing stuck in the doldrums

The latest numbers on sales, confidence levels and output make poor reading for manufacturing in most places in the world. What is going on?

The latest numbers on sales, confidence levels and output make poor reading for manufacturing in most places in the world. What is going on?

by
John Redwood

in Features

03.09.2019

The large Chinese manufacturing economy is struggling for enough orders. Germany had a down quarter to June, with no-one expecting much improvement if any in the third quarter. Although the US has been performing better, there too the indices are pointing downwards. We have been warning of a manufacturing recession for some time, and watch as it develops.

The car industry in particular has been weak. In China, car sales were down by more than 10% in the first half of the year. A 10% tax did not help, and buyers were concerned about the introduction of new emissions standards and held off buying as that settled down. In Europe, sales declined by a more modest 3% in the first half of this year, but export demand was depressed. The governing enthusiasms for electric cars has outstripped the willingness of customers to buy these new products, whilst leaving many buyers worried about spending on a new traditional vehicle that does not meet with government approval. In the US the market held up a bit better but there have still been falls in total sales, with larger cars suffering most. Some industry forecasters expect a fall for 2019 as a whole of maybe 5% worldwide.

An industry in flux

This structural issue has left the motor industry struggling. It has having to spend large sums on developing electric vehicles and putting in the new factories or lines needed to manufacture very different vehicles from the petrol and diesel cars they are used to. At the moment they are not selling anything like the volume of these electric cars to reward the capital well, and still having to try to promote the rival traditional vehicles and sell enough of those.

This is made more difficult where people think they will be subject to more taxes or more restrictions on use in the years ahead if they opt for the diesel or petrol model. This in turn has affected confidence and investment in related industries. It may no longer be a case of the US catches a cold when GM sneezes, but the car industry is still an important employer and a prominent indicator of the industrial economy. It is even more important to the German economy. Other manufacturing sectors linked to the investment cycle have also suffered from lower levels of world business confidence. More stable areas like food manufacturing have provided some offset to the bad news.

Some blame the trade war, which also plays its part in the manufacturing decline. US and Chinese companies are losing confidence all the time there is a tariff war underway affecting the products they sell. There are also interruptions to supply chains as the US bans certain Chinese technology goods and services, and as Japan extends her trade spat with South Korea. So far President Trump has held off imposing higher tariffs on EU cars into the US, though he has often tweeted about the injustice of the higher tariffs on US cars into the EU and may one day make the position worse for EU car makers by imposing a new higher tariff.

Slowing credit

Others blame the monetary slowdown which spread from the US and from China at the end of last year as central banks decided they needed to take pre-emptive action against a possible increase in wages and prices as economies recovered. Stock markets pushed back hard, and both the Fed and the Peoples Bank are now seeking to ease a bit. As industry slows, so people put on hold plans to increase raw material supply by expanding and investing in mines or other basic materials. That in turn hits the demand for investment goods like machinery and heavy transport, putting further downwards pressure on industry in general.

So far, the manufacturing downturn has not spread to services. These remain in positive territory in the US, UK, the Euro-area and China. They also represent a larger share of the economies. The Chinese, US, Japanese and German economies dominate in world manufacturing, accounting for well over half of industrial output. All of their governments and central banks want to stimulate these economies further and see some manufacturing revival. The stock market thinks this will take substantial changes to monetary policy with lower rates and more money creation, and in some cases state spending increases and lower taxes as well. They will need to review their policies towards new cars if they wish to help a leading industry which is finding the structural change to electric vehicles difficult to manage.

The next few weeks are important as we await a sufficient policy response from world authorities to see off the pessimism inherent in forecasts of global recession.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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