Delta takes a toll on global manufacturing

Vietnam's PMI fell from 45.1 in July to 40.2 in August, a level reflecting a dramatic decline in activity.

In China, factories and ports were disrupted by outbreaks of the Delta variant and the resulting restrictions imposed by the government as part of its zero-tolerance policy. In Southeast Asia, many factories shut down as the Delta variant became a significant problem. Although global demand for manufactured products is mostly strong, factory and port interruptions, shortages of transport capacity, hoarding of key inputs, and resulting shortages of those inputs have all contributed to the decline of industry growth, especially in East Asia. The growing gap between supply and demand has also contributed to rising inflation in many countries.

The latest purchasing managers’ indices (PMIs), released by IHS Markit, signal the deceleration. PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing sector. They are based on sub-indices such as output, new orders, export orders, employment, pricing, inventories, pipelines, and sentiment. A reading above 50 indicates growing activity; the higher the number, the faster the growth, and vice versa.

The global PMI declined from 55.4 in July to 54.1 in August, a six-month low. Out of 31 countries for which Markit collects data, 24 experienced a decline in their manufacturing PMI. However, 21 continued to have a PMI above 50, indicating continued growth in activity. Ten countries had PMIs below 50, indicating contracting activity. Markit noted that global output grew, but at a slower pace. It commented that “efforts to raise production further were constrained by supply chain issues and, in some cases, shortages of labor and skills.” Not surprisingly, it said that exports of manufactured goods grew at the slowest pace in seven months. After all, transportation of goods has been disrupted.

The PMIs for the United States, Eurozone, and the United Kingdom were at a high level, reflecting rapid growth of activity. Still, the PMIs did decline somewhat. The main contributor to the decline in the global industry, however, has been East Asia. The PMI for China fell from 50.3 in July to 49.2 in August, indicating a decline in activity. The sub-index for output fell for the first time since February. The main problem in China has been the disruption from the virus. Markit commented, “The latest COVID-19 resurgence has posed a severe challenge to the economic normalization that began in the second quarter of last year. Manufacturing shrank in August as both supply and demand weakened. Meanwhile, overseas demand also dropped. The job market weakened slightly, though it managed to maintain overall stability. Manufacturers cut purchases, leading to a rise in stocks of finished goods.”

The disruption in China, combined with local outbreaks of the virus, have significantly hampered the industry in Southeast Asia. The PMI for ASEAN remained unchanged at 44.5, having fallen significantly from June to July as the pandemic worsened. The current PMI is at a level indicating a rapid decline in activity. Of particular concern is Vietnam, where the PMI fell from 45.1 in July to 40.2 in August, a level reflecting a dramatic decline in activity. Markit noted, “Vietnamese manufacturers are facing a near-impossible task at present as the restrictions put in place to try and contain the spread of the COVID-19 outbreak in the country constrain their ability to produce goods. Some are closed outright, with others operating at reduced capacity and with scaled down staff members.” Given Vietnam’s major presence in the textile, apparel, and footwear markets, the disruption there is likely to hurt the ability of major retailers to obtain inventory for the holiday season.

The manufacturing industries of Japan, Korea, and Taiwan continued to grow in August, unlike those of China and Southeast Asia. The PMIs were 52.7 for Japan, 51.2 in South Korea, and 58.5 in Taiwan. The strong number for Taiwan reflects the country’s considerable presence in the robust technology sector. However, in Taiwan as well as in Japan and South Korea, the PMI declined from July. This was due to the supply chain disruption that has affected much of the world. In fact, in the case of Japan, the weakening of the sector was directly linked to the troubles in Southeast Asia, which supplies components to many Japanese factories.