LDN - Business

Pent-up demand driving global factory revival

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

LONDON/TOKYO (Reuters) - Demand for manufactured goods drove extended growth in factories across Europe and Asia in February, but a slowdown in China underscored the challenges countries face as they seek a sustainable recovery from the COVID-19 pandemic blow.

Restrictions imposed around the world to try and quell the spread of the coronavirus have shuttered vast swathes of the services industry, meaning it has fallen to manufacturers to support economies.

But vaccine rollouts and a pick-up in demand provided optimism for businesses that have grappled for months with a cash-flow crunch and falling profits.

IHS Markit's final Manufacturing Purchasing Managers' Index (PMI) jumped to a three-year high of 57.9 in February from January's 54.8, beating the initial 57.7 "flash" estimate for one of the highest readings in the survey's 20-year history.

German factory activity also reached a three-year peak last month and in France the pace of growth accelerated. Italy and Spain also saw a pick-up.

However, lockdown measures disrupted supply chains and factories struggled to obtain raw materials, leading to a big increase in delivery times.

"International shipping delays and strong global demand for raw materials have slowed manufacturers worldwide," said Samuel Tombs at Pantheon Macroeconomics.

Factories in Britain, outside the euro zone and the European Union, reported the slowest output growth since May last month. Disruptions and rising costs linked to Brexit and COVID-19 limited their ability to respond to a modest pick-up in orders.

ASIAN RECOVERY

Manufacturing activity in Japan expanded at the fastest pace in over two years and South Korea's exports rose for a fourth straight month, suggesting Asia's export-reliant economies were benefiting from robust global trade.

On the flip side, China's factory activity grew at the slowest pace in nine months, hit by a domestic flare-up of COVID-19 and soft demand from countries under renewed lock-down measures.

"In all, the softer pace of activity in today's (Chinese) manufacturing print is likely to be temporary, and we expect the growth momentum to pick back up on the back of a broadening out of the domestic demand recovery and a pick-up in global demand," said Erin Xin, an economist at HSBC.

[to top of second column]

Employees wearing masks work at a factory of the component maker SMC during a government organised tour of its facility following the outbreak of the coronavirus disease (COVID-19), in Beijing, China May 13, 2020. REUTERS/Thomas Peter/File Photo/File Photo

"However, household consumption, while recovering, has not yet fully reached pre-pandemic levels of growth due to continued labour market pressure."

China was the first major economy to lead the recovery from the COVID-19 shock, so any signs of prolonged cooling in Asia's growth engine will likely be a cause for concern.

With the global rebound still in its early days, analysts said the outlook was brightening as companies increased output to restock inventory on hopes vaccine rollouts normalise economic activity.

"The recovery in durable-goods demand is continuing, which is creating a positive cycle for manufacturers in Asia," said Shigeto Nagai, head of Japan economics at Oxford Economics.

"As vaccine rollouts ease uncertainties over the outlook, capital expenditure will gradually pick up. That will benefit Japan, which is strong in exports of capital goods," he said.

China's Caixin/Markit Manufacturing PMI fell to 50.9 in February, the lowest level since last May but still above the 50 mark that separates growth from contraction.

Activity elsewhere in Asia remained brisk.

The Japan PMI jumped to its highest since December 2018. In South Korea, a regional exports bellwether, shipments jumped 9.5% for a fourth straight month of increase.

India's factory activity expanded for the seventh consecutive month on strong demand and increased output, though a spike in input costs could weigh on corporate profits ahead.

The Philippines, Indonesia and Vietnam also saw manufacturing activity expand in February, a sign the region was recovering from the initial hit of the pandemic.

(Reporting by Jonathan Cable and Leika Kihara; editing by Shri Navaratnam, Larry King)

Back to top