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Global manufacturing under pressure

The global manufacturing sector is having a tough time due to overcapacity and structural changes in the industry. What can be done?

The global manufacturing sector is having a tough time due to overcapacity and structural changes in industry. What can be done?

by
John Redwood

in Features

03.10.2019

The manufacturing recession is as tough and as difficult as we imagined. This has led to a weak season for company profit reports and wider fears of a more generalised downturn. So far, the consumers in the US, the EU, Japan and China have kept the economies going, with services sustaining overall economic growth. Job generation has remained good in the US and UK, and satisfactory in much of the Eurozone and China. Real incomes have advanced, underpinning the modest growth rate. It looks as if Germany, with a larger manufacturing sector than most advanced nations, may be in recession as the substantial reduction in industrial activity may more than offset the growth in services.

So why has manufacturing fared so badly if there are more and better paid jobs around? Part of the reason is structural changes brought about by the need to reduce carbon dioxide emissions. The rapid transition sought by various governments to electric vehicles, with higher taxes and regulations on diesel and petrol vehicles has hit vehicle sales. This has been compounded by higher taxes on cars in China and the UK, and for a period by higher car loan interest rates in the US. The move against single-use plastics and plastics more generally has cut demand for products from the polyolefins industry. Although total plastics demand and output worldwide has been rising, the moves towards single use plastic bans in India as well as the EU and Canada points to more forthcoming weakness in parts of this controversial industry.

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Part of the reason is the nature of modern demand. The older half of the population with more of the assets and income seem keener to spend money on events, leisure, eating and drinking out and experiences rather than on more manufactured products. All generations also place much higher priority on spending on the equipment and services of the digital age than on the more traditional products that predate the smartphone. Part of the reason is the large overcapacity built by China amongst others in recent years, leading to weak pricing and the need to reduce factory output. Recent figures show that prices of various manufactured goods like clothing and electricals have been weak thanks to too much supply and too little demand.

What can be done about this? Governments and central banks are trying traditional responses. They are cutting interest rates, introducing new or larger bond buying programmes and encouraging commercial banks to lend. Some are spending more on state services and taxing less by offering tax reductions. These can be helpful and should lead to some more manufactured products being bought by both the public and private sectors. They do not, however, tackle the structural or deeper-seated part of what is happening. They do not suddenly make people want to buy an electric car – or solve the problem of the shift in consumer preferences to services and technology.

China is key

At the heart of the industrial struggle lies China. China greatly expanded its industrial output this century and became the main exporter of a wide range of products. China’s growth model was based on industrial investment and export of good value items from its factories. Today, China is trying to pilot a complex reorientation of her economy. Chinese people expect higher growth of real incomes, more production for home consumption and greater priority to services and consumption. Air quality has been bad providing opportunity for the government to close down the worst offending industrial plants in a bid to reduce capacity. China too is trying to move up the value chain, leaving more basic manufacture to neighbouring economies in Asia. It is a slow process, and world capacity in many areas from steel to cars is still high relative to demand.

Share markets are reflecting these big structural shifts. The digital revolution has created a two-tier market with much better performance from the technology winners. The green policies will also have a marked impact on what people make and how they make it. Industry will continue to decline as percentage of total activity, and within industry there will be big changes of product and methods of production. Meanwhile, markets worry that the manufacturing downturn will move across to the much larger services sectors and push more countries into a general recession. Germany may well be in recession, but it still looks as if the US, China and the Eurozone as a whole will escape this as stimulus policies kick in.

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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