The JPMorgan Global Manufacturing Purchasing Managers' Index™ (PMI™) compiled by S&P Global, held steady at 48.7 in July. However, by remaining below 50, the indices signaled an eleventh successive deterioration in the health of the goods-producing sector. Moreover, the headline index masked worsening downturns in both production and new orders, the latter linked to a steepening slide in global trade flows and an ongoing focus on inventory reduction.

The eurozone continued to report the steepest decline, though output notably also fell in mainland China, Taiwan, South Korea, Malaysia, the UK, Brazil and Japan, while only a marginal gain was recorded in the US.

Business expectations in the year ahead meanwhile remained subdued by historical standards, reflecting concerns over the various headwinds facing goods producers around the world.

Global factories cut output at sharper rate

Global manufacturing output fell for a second successive month in July, according to the latest PMI surveys compiled by S&P Global and sponsored by JP Morgan. At 49.0, down from 49.3 in June, the output index from the Global Manufacturing PMI - our preferred measure of current factory production - fell to its lowest since January.

Although the rate of decline signaled remains only modest, any contraction of global production is a rare occurrence. Besides the pandemic years, there has only been one other spell of falling global output since the eurozone debt crisis of 2012, which was a modest decline seen in 2019 in response to the US trade wars under President Donald Trump.

Leading the weakness of global production was an intensification of the recent downturn in global goods trade. New export orders for manufactured goods fell in July at the fastest rate recorded so far this year, dropping for a seventeenth straight month. This represents the worst prolonged period of global trade decline since the global financial crisis.

Depletion of backlogs of work

The downturn in global goods exports contributed to a further decline in new order inflows at manufacturers worldwide, which fell in July for a thirteenth successive month. The rate of decline accelerated to the joint-steepest since December 2022.

This prolonged spell of falling inflows of new orders has meant producers have had to rely on back orders to sustain even reduced production levels. These backlogs of work had risen sharply during the pandemic due to supply shortages. However, supply chains have improved continually since February, helping producers fulfil these existing orders.

The concern is that, with backlogs of work being depleted amid a dearth of new orders, production losses could accelerate in the coming months. Note that backlogs of work have now fallen for 13 successive months - dropping in recent months at a rate not seen since the global financial crisis barring only the initial pandemic lockdowns.

Inventory unwind in full flow still

Adding to the current manufacturing malaise is a further trend towards inventory reduction.

Input buying by manufacturers fell in July at the fastest rate since January, dropping for a twelfth consecutive month. Inventory holdings of raw materials, or stocks of inputs, consequently fell for a ninth successive month. Stocks of finished goods were meanwhile also allowed to fall, dropping for the seventh time in the past eight months in July.

Looking at the reasons given by survey contributors for falling inventories, the downturn in stocks of inputs has been fueled by cost-cutting as well as a reduced need to hold safety stocks, which had risen to an unprecedented degree during the pandemic amid supply fears. The amount of input buying by factories for safety stock considerations is now running well below the survey's long-run trend.

Meanwhile weak demand was the main factor behind the recent desire to reduce inventories of finished goods. The incidence of factories deliberately unwinding their stock holdings of finished goods due to the weak demand environment has been running at its highest since the global financial crisis in recent months.

India leads global production rankings

Of the 31 economies for which manufacturing PMI data from S&P Global are available for July, only ten reported higher output (unchanged on June). The largest increase was again recorded in India, followed by Indonesia. Thailand, Greece, the Philippines, Kazakhstan and, to lesser degrees, Mexico, Russia and Canada also reported noteworthy production gains. Only a marginal gain was meanwhile recorded in the US.

At the other end of the scale, seven of the eight worst ranking economies were also found in Europe, meaning the eurozone was again the worst performing region. Austria recording the steepest decline of the 31 manufacturing PMI surveys. Tawain saw the second-steepest fall. Outside of the eurozone and neighbouring eastern Europe, notable declines were also seen in South Korea, Malaysia, the UK and Brazil, with more modest but still disappointing declines registered in Vietnam, Japan and mainland China.

Outlook

The July surveys therefore underscored how the worldwide manufacturing economy continues to be hit by headwinds from higher interest rates, the rising cost of living, inventory reduction policies and the post-pandemic shift of spending from goods toward services.

One area of support to look out for in the coming months will be the reduced drag from the inventory unwind, once stock levels have been reduced to desired levels. There are also signs that the peaking of inflation and interest rates will help to revive spending.

However, price levels remain high, and interest rates at their highest since the lead up to the global financial crisis, with policymakers keen to manage expectations that rates will not be lowered too quickly in order to continue nudging inflation lower.

In this environment, the outlook remains one where the balance of risks appear tilted towards ongoing decline or very modest growth at best. While manufacturers themselves reported a slight brightening in their average outlook for the coming 12 months in July, it should be noted that the level of business confidence remains well below the survey's long run average, reflecting broad-based concerns about persistent headwinds to growth in the months ahead.

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Chris Williamson, Chief Business Economist, S&P Global Market Intelligence

Tel: +44 207 260 2329

chris.williamson@spglobal.com

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Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.