Auto Bust Triggers Sharp Slowdown In Global Manufacturing

The gloom of the world is centered around auto manufacturing, which is dragging on the global economy, fuelling fears that a worldwide trade recession has already begun.

The first domino to fall has been auto manufacturing, already hitting a near-record low in August, reported the Financial Times.

New data from IHS Markit global car industry purchasing managers’ index shows some of the sharpest declines across all sectors, not seen since 2009.

IHS indices for industrial goods, machinery, equipment, metals, and mining fell below the 50 mark, indicating that executives saw their businesses contracting.

The Financial Times blames much of the global slowdown on the escalation of the US-China trade war and its disruption of complex supply chains that have led to depressed exports and lower overall trade volumes.

Global export volumes fell by 1.4% in June YoY, according to the CPB Netherlands Bureau for Economic Policy Analysis.

“The world trade slowdown has much to do with the manufacturing downturn,” said Adam Slater, lead economist at Oxford Economics.

“World trade has contracted, which is quite unusual outside a recession period, and it might worsen.”

*chart world trade volume

Jennifer McKeown, head of global economics at Capital Economics, said, “machinery, metal, and auto vehicles have driven more than half of the slowdown in global manufacturing since it peaked at the end of 2017. That suggests that is closely related to the weakness in investment globally, which would have affected the demand for machinery.”

The epicenter of the downturn is likely Europe, and to be more precise, it started in Germany, a major exporter on the continent. Slowing demand for German cars, EU emission tests, stagnating regional economy, and concerns of a US-Europe trade war have all affected car manufacturers on the continent.

The auto manufacturing downturn is spreading quickly. Also seen in China, India, Japan, and now the US.

The US has finally contracted a cold, and it’s one that isn’t going away anytime soon. June manufacturing output fell on an annual basis in July, while the main sentiment index slid into the contraction in August.

In the US, “domestic activity has seemingly converged with the rest of the world in a full-scale downturn,” said Iaroslav Shelepko, an economist at Barclays.

The global manufacturing downturn is likely to persist through 1H20.

Global central banks are cutting rates aggressively to stave off a downturn. But loose monetary policy around the world could take upwards of a year to positively affect global manufacturing data.

The next shoe to drop will be global consumer sentiment – and for countries heavily reliant on consumers, such as the US, this could mean a further slowdown that is more broad-based could be seen in 2020.