Global trade’s ‘new normal’ is denting manufacturers’ confidence
Surveys of purchasing managers from around the world show confidence at manufacturers continue to weaken
Zurich/Frankfurt: Factories from Asia to Europe are staring into the unknown when it comes to trade, and it’s unnerving them.
Surveys of purchasing managers from around the world showed confidence at manufacturers is continuing to weaken. China’s outlook is “lacklustre” and Germany and Italy also saw the mood darken.
“There’s a bit of a new world order where uncertainty and volatility have become a little bit the new normal,” said Pernod Ricard Chief Executive Officer Alexandre Ricard. “For us, free trade is something which is of utmost importance.”
Donald Trump’s protectionist stance has upturned the world’s long-standing way of doing business, leaving export-reliant industries exposed to heightened apprehension about the future and increased costs. Confidence has deteriorated markedly since the start of the year and there may be more reason to fret, with Bloomberg reporting last week the US president wants to move ahead with a plan to impose tariffs on $200 billion of Chinese exports.
China may already be feeling the pressure. The Caixin Factory PMI weakened in August and new orders from abroad declined for a fifth straight month. Zhengsheng Zhong, Caixin’s director of macroeconomic analysis in Beijing, said the export situation is “grim,” and the economy is facing “relatively obvious downward pressure.”
In the euro area, the Purchasing Managers’ Index for manufacturing dropped to the lowest level in almost two years, IHS Markit said on Monday. A measure of new orders fell and business expectations were at the weakest since 2015.
“Trade should be at least moderately predictable,” Alexander Stubb, vice president of the European Investment Bank, told Bloomberg Television on Monday. “And with the statements coming from the US, it doesn’t seem very predictable.”
In addition to damping demand, trade tariffs mean an extra squeeze on costs. In Europe, growth in input prices is already “elevated,” according to the PMI. Japan saw a sharp increase in August, thanks to fuel and metals, and companies protected their margins by raising prices at the steepest pace in a decade.
Ricard, whose drinks company has annual revenue of about 9 billion euros ($10.5 billion), warned last week that if operations get hit with levies, he’ll have to raise prices for customers.
While the US is the source of much of the uncertainty, its companies are not immune to the fallout from the tit-for-tat battle that’s ensued with the European Union and China. Brown-Forman Corp., the maker of Jack Daniel’s whiskey, cut its profit forecast last week, saying it assumes that EU tariffs, put in place in June, will remain in place for now.
The Institute of Supply Management’s manufacturing index for the US is forecast to have dropped in August after a bigger-than-anticipated decline in July. It will be published on Tuesday, the same day as IHS Markit’s factory gauge.
Still, while the trade war may slow the US and Chinese economies, a weaker dollar and the still growing size of China’s share of world GDP will cushion the blow, according to Ben May, director of global macro research at Oxford Economics.
“Slower US growth is expected to be accompanied by a weaker dollar, which will soften the blow,” May wrote in a note. “China’s growing share of world GDP means that its contribution to GDP growth will fall only marginally.”
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