In China, government spending on infrastructure projects is helping push up manufacturing for goods like fabricated metal.
Photo: Hejinghua/Zuma PressFactories across Europe and parts of Asia increased production in July, but the upswing was held back by weak overseas demand, suggesting a long and precarious road ahead for the global economy.
Export orders were soft across most of the countries surveyed in July by research firm IHS Markit, and activity contracted in two export powerhouses, Japan and South Korea. With the international outlook uncertain, manufacturers in most countries saved costs in July by cutting jobs.
The data suggest that easing lockdown restrictions may not be enough to get the global economy back on track. Governments, especially those with export-oriented business models, may need to find a way to stimulate domestic demand to offset lingering weaknesses in international demand for foreign-made goods.
In China and Australia, government spending on infrastructure projects is helping push up manufacturing for goods like fabricated metal and machinery, said Bernard Aw, principal economist for IHS Markit who oversees the PMI surveys in the Asia-Pacific.
Global trade flows tumbled in the first half of the year, as the coronavirus pandemic caused policy makers and multinationals to reconsider globe-spanning supply chains that have become a defining feature of the world economy. The World Trade Organization’s economists estimate that flows will fall by at least 13% during 2020 as a whole, and possibly by much more.
Many trade experts expect that the global public health emergency will push companies to simplify and shorten their supply chains, which could in turn weigh on trade. The pandemic raised concerns in many countries about relying on big exporters such as China, especially for critical items such as medical supplies.
In China, where the pandemic was largely brought under control, manufacturers reported the quickest expansions of output and new domestic orders in almost a decade. But new export orders continued to contract, and overall staff numbers fell modestly, IHS Markit said. Its survey of business managers, a snapshot of operating conditions in the manufacturing sector, rose to 52.8 in July from 51.2 in June. Readings above 50 indicate activity is expanding across the manufacturing sector, while those below 50 signal contraction.
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“We still need to pay attention to the weakness in both employment and overseas demand,” said Wang Zhe, senior economist at Caixin Insight Group.
The sudden halt in trade has exposed how interdependent countries are in sourcing and manufacturing everything from cars to ventilators to smartphones. Individual countries have become nodes in vast supply chains whose vulnerability became clear when the pandemic sliced them apart.
As a result, the coronavirus—along with previous tensions between China and the U.S. over trade and technology—is forcing multinationals and policy makers to consider ways to bring production closer to home, safeguard the production of essential goods and reduce their reliance on China as a manufacturing base.
In the U.K., manufacturers looked to build more localized supplier bases in July amid strong demand from the domestic market, and lackluster demand from overseas customers, said Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply.
In the eurozone, the manufacturing sector recorded its first growth in 18 months in July, with the overall index rising to 51.8 from 47.4 the previous month, according to IHS Markit. Consumer goods was the best performing sector, reflecting an easing of tight restrictions put in place to contain the spread of the coronavirus.
But the data suggest that most businesses in the export-oriented sector are still operating below capacity and cutting jobs to save costs. In Germany, Europe’s largest economy and one of the world’s biggest exporters, manufacturers continued to make deep cuts to employment as output languished below precrisis levels, according to the surveys. Exports increased more moderately than domestic sales in July.
“The next few months numbers will be all important in assessing whether the recent uplift in demand can be sustained,” said Chris Williamson, chief business economist at IHS Markit.
Across much of Asia, manufacturing conditions continued to recover from the second quarter, but still short of the 50-point baseline that represents growth.
South Korea, regarded as a bellwether for global trade, recorded an index of 46.9 in July from the previous month’s 43.4. On Saturday, the country’s trade data showed that July exports shrank by 7% from the previous year, compared with a 10.9% year-over-year contraction in June.
Japan’s manufacturing index also rose to 45.2 in July from 40.1 in the previous month. Capital goods production was the worst-performing segment for export sales, showing how reduced global investment spending and constrained trade flows are holding back the recovery. For the first 10 days of July, the country’s exports dropped 18.8% from the previous year.
“Rising infection rates in key export destinations do not bode well for recovery of trade-dependent Asia economies, even with better containment within Asia,” said Kwon Goo-Hoon, senior Asia economist for Goldman Sachs, in a note to clients.
Write to Tom Fairless at tom.fairless@wsj.com and Eun-Young Jeong at Eun-Young.Jeong@wsj.com
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