Global business cycle starts to turn down: Kemp
Global manufacturing activity and freight movements have begun to decelerate as the major economies buckle under the combined impact of inflation, lockdowns, sanctions and rising interest rates.
Worldwide industrial production in the three months between February and April was just 3.75% higher than in the corresponding period a year earlier, according to the Netherlands Bureau of Economic Policy Analysis (CPB).
Growth has slowed progressively after peaking at nearly 15% in the first quarter of 2021, when the main economies were rebounding from the first wave of the coronavirus pandemic (“World trade monitor”, CPB, June 24).
In absolute terms, output appears to have peaked in February then started to fall as China locked down several major cities and sanctions and surging inflation hit consumer and business spending in Europe.
Purchasing managers’ surveys for the United States, the euro zone and China all show the expansion of business activity losing momentum, or in China’s actually falling, in the second quarter.
Freight movements appear to have peaked even earlier, around December, and have been trending lower since the start of the year (https://tmsnrt.rs/3y9MfVo).
Global trade volumes were 3.76% higher in February-April compared with the same period a year earlier, a relatively slow rate of growth.
But the most recent data shows volumes were down 0.3% in February-April compared with November-January, even after seasonal adjustments.
On this measure, volume growth is in only the 10th percentile for all periods since 1991, implying a significant slowdown is already underway.
South Korea’s KOSPI-100 equity index contains a large number of export-oriented manufacturing businesses and has been closely correlated with the trade cycle over the last two decades.
The KOSPI-100 has continued to fall in recent months and is now down 30% compared with the same period last year, indicating the trade volumes have likely fallen further in May and June.
The slowdown is both necessary (capacity constraints have become binding in a multiplying number of industries) and intentional (central banks have engineered a significant tightening of financial conditions to cool inflation).
As the slowdown progresses, it will re-establish spare capacity in a number of industries and rob at least some manufacturers and transportation firms of pricing power, eventually causing inflation to decelerate.
In petroleum, the main impact will be felt in diesel, the fuel used by manufacturers, road hauliers, railroads and shipping firms.
U.S. inventories of diesel and other distillate fuel oils have been rising after hitting a 17-year low in early May, according to high-frequency data from the U.S. Energy Information Administration.
Some of the increase is seasonal as refineries ramp up crude processing to produce more gasoline for the summer driving season (“Weekly petroleum status report”, EIA, June 29).
But some of the stock accumulation likely reflects moderating demand as manufacturing and freight slow and higher prices enforce fuel saving.
U.S. distillate inventories have risen by more than 8 million barrels over the last seven weeks, the fastest seasonal increase since 2008, excluding the distortions caused by the pandemic in 2020.
The more or less continuous erosion of distillate inventories since September 2020 seems to have been arrested in May and June 2022.
The manufacturing, freight and diesel data are all consistent with a global business cycle slowdown already underway - centred on China and Europe, but likely to spill over into North America in the next few months.
- Diesel demand set to drop as economies enter recession (Reuters, June 23)
- Surging oil prices show business cycle slowdown is inevitable (Reuters, June 14)
- Economic war pushes business cycle to tipping point (Reuters, March 23)
- Western economies on brink of recession as Russia sanctions escalate (Reuters, March 8)
John Kemp is a Reuters market analyst. The views expressed are his own