LDN - Business

Global factory recovery picks up, but cost pressures grow

[April 01, 2021] By Jonathan Cable and Leika Kihara

LONDON/TOKYO (Reuters) -Factories across Europe and Asia ramped up production in March as a solid recovery in demand helped manufacturers move past the setbacks of the pandemic, although escalating costs and supply- chain disruptions were creating challenges and driving prices.

A series of upbeat factory surveys released on Thursday reinforced market optimism that vaccine rollouts, as well as strong growth in global powerhouses like the United States and China, would help economies emerge from their sharp downturns of 2020.

Euro zone monthly factory activity growth galloped at its fastest pace in the near 24-year history of a leading business survey last month, but supply chain disruptions and renewed lockdowns in the region may rein it in soon. [EUR/PMIM]

IHS Markit's final Manufacturing Purchasing Managers' Index (PMI) jumped to 62.5 in March from February's 57.9, above the initial 62.4 "flash" estimate and the highest reading since the survey began in June 1997.

"The euro zone manufacturing sector proved once again to remain resilient through the re-imposed wave of lockdowns," said Maddalena Martini at Oxford Economics.

In Germany, Europe's largest economy, activity grew at the fastest pace on record. In France, the bloc's second-biggest economy, it hit levels not seen since the internet boom at the turn of the century.

But much of Europe is suffering a third wave of coronavirus infections, and with a slow vaccine rollout in the region, governments have re-imposed tough controls on citizens, likely hitting the bloc's dominant services industry hard.

Meanwhile, supply-chain issues, exacerbated when the recent blockage of the Suez Canal caused disruption in global shipping and ports that could take months to resolve, has driven a surge in input prices and the biggest increase in suppliers' delivery times since the survey began.

"Margins are coming under pressure because of all the supply-chain issues. The Suez issue didn't help and we now have inventories at very low levels," said David Owen at Jefferies.

In Britain, outside the currency union, factories rode a wave of orders and prepared for a gradual re-opening of the economy from its COVID-19 shutdowns by hiring staff at the fastest rate since 2014. [GB/PMIM]

ASIA EXPANDS

Japan and South Korea saw factory activity expand in March thanks to solid demand at home and abroad, PMIs showed, offering relief to policymakers facing pressure to speed up a patchy recovery.

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An employee of Sanko Manufacturing Co. conducts shipping operations of the company's ventilators at the factory as the spread of the coronavirus disease (COVID-19) continues in Saitama, north of Tokyo, Japan May 8, 2020. REUTERS/Issei Kato

"South Korean manufacturers continued to signal strong optimism as the rollout of COVID-19 vaccinations began and demand for new products accelerated," said Usamah Bhatti, economist at IHS Markit.

China's factory activity in March expanded at the slowest pace in almost a year, though underlying economic conditions remained positive.

The Caixin/Markit Manufacturing PMI, which focuses on smaller firms, dropped to 50.6 in March from February's 50.9, missing market expectations.

The private-sector survey came after the official manufacturing PMI on Wednesday, which showed Chinese factories cranking up production after a brief lull during the Lunar New Year holiday.

Activity in big, export-reliant economies stayed brisk.

The final au Jibun Bank Japan PMI rose to a seasonally adjusted 52.7 in March from the previous month's 51.4 reading, marking the fastest expansion since October 2018.

South Korea's PMI stood at 55.3 in March, with activity expanding for a sixth straight month.

Manufacturing activity also accelerated in Taiwan, Vietnam and Indonesia, the March PMI surveys showed. Malaysian activity continued to decline but at a slower pace.

Although supply-chain disruption related to previous COVID-19 outbreaks eased, China's Caixin survey showed factories reporting a sharp increase in input costs.

"Input prices continue to outpace output prices, suggesting there may be some risk to profit margins," said Erin Xin, China economist at HSBC.

"Should there be significant compression in profit margins, this could dampen firms' capex spending in the coming quarters."

(Reporting by Jonathan Cable and Leika Kihara; Additional reporting by Daniel Leussink; editing by Sam Holmes, Larry King)

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