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The manufacturing recession grinds on

Manufacturing is in turmoil worldwide as growth slows, but the situation is “least bad” in the USA.

Manufacturing is in turmoil worldwide as growth slows, but the situation is “least bad” in the USA.

John Redwood

in Features


For the first 20 days of October, South Korean exports were down by 19.5% in value, a new low in their falls over the last year. Its giant company Samsung has expanded its semiconductor capacity and helped drive chip prices down worldwide. The value of semiconductor exports was down by 28.8%. The fall in chip sales to the US was 17.4%, to China 20% and to the EU a massive 37%. This bears out the feeling that the economic slowdown is worst in Europe and least bad in the US amongst the advanced markets of the world.

There is no lack of interest worldwide in mobile phones, notepad computers and other equipment needed to keep people online and plugged into the digital revolution. Growth rates in some of these products however are slower this year. Some of the main producers like Apple are seeking to expand their services business on the back of their products at a time of consolidation for product sales. The big swings in the sales value of the chips that are needed in such devices has more to do with the cyclical swings in semiconductor production, with a big increase in capacity for memory chips leading to substantial price weakness.

Meanwhile, the car industry still struggles, fighting large sales falls for its diesel products in many markets in particular. Car demand has been hit by tax rises, regulatory changes and government pressures to get people to go electric before they are keen to buy these new vehicles.

Asian slowdown

China is concerned about its own slowdown. The most recent figures show overall growth down at 6%, below where the government usually feels comfortable. South Korea, an important supplier of China, has just downgraded its official growth forecast from around 2.5% to just over 2% in the light of deteriorating world trade and the export problems they are encountering. The Chinese authorities have plenty of scope to act to try to expand more rapidly. They can spend more, invest more, cut taxes, expand money and encourage more borrowing. They have done a bit of all of this but are currently being careful.

The most-recent review of Chinese money policy by the central bank saw it running at 8.4% growth for broader money. The People Bank of China (PBoC) decided to keep its interest rates on hold, with the one-year benchmark at 4.2% and the five-year at 4.85%. The Governor of the PBoC recently confirmed he wishes to progress the opening-up of China’s financial sector. He wants to lift the cap on equity investment by foreign companies and provide a level playing field for businesses from overseas operating in China’s financial sector. The PBoC is still pursuing its policy of internationalising its domestic currency.

Trade dispute

Vice Premier Liu meanwhile is telling the world China seeks a resolution of the US trade dispute, and is using encouraging words to try to move to a limited agreement with the US. They hope to cancel further tariff rises and offer to buy more US food as part of this possible deal. Taken with the words of the central bank it appears that China thinks there have to be international answers to the trade issues to ease the economic slowdown. The damage to confidence the tariff spats generate is seen as a serious difficulty which needs at least partial resolution by an agreement with the US. Markets are hoping for something more by way of stimulus from China and from other major economies.

Later this week Mr Draghi chairs his last European Central Bank interest-rate setting meeting. Given the weakness of European industrial demand all eyes are on him to announce yet more stimulus. At the end of the month the Fed meets again. The US will need to decide if there is a trade resolution in sight and, if so, what difference that will make to confidence and trade volumes. It looks as if the markets will want further monetary stimulus from both these institutions. Meanwhile money growth is good in America and we expect the US economy to be the least bad performer of the advanced nations.

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