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Home / Markets / Mark To Market /  The supply chain snafu clouding global economic revival

The global economy remains in the doldrums, with manufacturing growth continuing to lose momentum. The JP Morgan Global Manufacturing purchasing managers’ index (PMI) fell to a six-month low of 54.1 in August. In July, the reading was 55.4. A reading above 50 indicates expansion and below the threshold points to contraction.

Although the number is in the expansion zone, a broad-based dip has been recorded in manufacturing activities in dev-eloped and emerging markets.

What is more worrying is that global growth continues to be hampered by severe supply chain disruptions. This was highlighted by a further marked increase in average vendor lead times in August. In fact, the increase could be compared with that of June’s series record, said the PMI report. Also, companies reported transportation delays and shortages developing for inputs and raw materials, it added. Consequently, the output sub-components fell by more than the headline PMIs for many key economies.

 

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Satish Kumar/Mint

According to analysts at Nomura Financial Advisory and Securities Ltd, the spread of the delta variant amid still-low vaccination rates in many Asean (Association of South East Asian Nations) economies and China’s zero-tolerance covid strategy have prompted governments to impose restrictions and order factory/port closures. “As a result, raw material shortages, port congestion and unavailability of containers have lengthened lead times, at a time when chip inventories are already running low," said a Nomura report dated 1 September.

It should be noted that the suppliers’ delivery times sub-index component of the PMI declined in eight out of nine Asian economies in August and remained below 50. Since Asia is a global manufacturing hub, supply constraints, if sustained for a long period, do not bode well for global economic revival. In simple terms, input shortages and low inventories would result in production cuts and delayed shipments.

“The fall in China’s index to an 18-month low confirmed that the recovery there is coming off the boil, with supply shortages worsening amid Asia’s outbreak and demand also weakening," said Jennifer McKeown, head of global economics service at Capital Economics.

According to McKeown, there is early evidence that the adverse effects of these shortages may have peaked as indices of suppliers’ delivery times and input prices have stopped rising. That said, they still remain at elevated levels. McKeown cautioned that supply constraints won’t be fixed fast.

Meanwhile, business confidence among manufacturers dipped to a 10-month low in August, not surprising in the backdrop of the supply shortage. But manufacturers don’t seem to have lost hope as the sentiment index is above its long-term average, say economists. For now, stranded shipments must begin to move fast for global growth to gain pace.

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