Global trade tensions took its toll on factory growth in major manufacturing hubs in May as companies braced for potential damage, while also grappling with accelerating inflation and a strong dollar.
U.S. President Donald Trump’s moves to slap tariffs on some of the country’s most important trading partners have rattled financial markets, and many are now fretting about the potential threat to what is now mostly synchronized world growth.
Stocks rose and bond yields fell on Friday as investors welcomed an apparent end to a political crisis in Italy but prospects for a full-blown trade war put a dampener on gains.
“The uncertainty about future trade and Trump’s contempt for international rules can deal a significant blow to business confidence especially in trade-oriented nations,” said Holger Schmieding, chief economist at Berenberg.
That danger was made all the more real on Thursday when the United States and its key allies announced tit-for-tat tariffs.
A U.S. trade delegation is in Beijing this weekend for a third round of talks between the two countries in the last month after Washington said it would slap tariffs on $50 billion of Chinese imports.
The risk is that a full-blown Sino-U.S. trade war will ripple through global supply chains, hurting economies from Europe to Mexico through to Australia and Japan.
Euro zone factory growth stayed strong but slowed to a 15-month low in May, hampered by extra holidays, and forward-looking indicators suggest it will at best remain subdued in coming months, a business survey showed.
Higher prices appear to have hurt demand and IHS Markit’s May final manufacturing Purchasing Managers’ Index for the bloc slipped for a fifth month, falling to a 15-month low of 55.5 from April’s 56.2, in line with a flash reading.
German factory growth was also at a 15-month low and French manufacturing activity picked up less than expected, highlighting a more uncertain trade outlook.
British manufacturers bucked the global trend in May and picked up speed for the first time in six months. But the slight improvement masked underlying weakness among the country’s factories.
Chinese manufacturing, meanwhile, has grown steadily so far this year. The Caixin/Markit Manufacturing PMI was unchanged at 51.1 in May, although new export orders fell for a second straight month.
“Forthcoming trade tensions could put pressure on trade and related supply chain activities … We believe that investment decisions in potentially affected industries have been delayed,” ING China economist Iris Pang said in a note.
The Markit/Nikkei Japan Manufacturing PMI fell to a seven-month low of 52.8 for May, with domestic business growth slowing and only a modest pick up seen in export orders.
Corporate capital expenditure in Japan rose at a slower pace in the first quarter compared with the previous one, a separate report showed. Further stress on exports is likely to restrain any rebound from an economic contraction at the start of the year.
South Korea, another major export hub, reported strong shipment growth in May. But a factory survey found activity contracted for a third straight month as new orders continued to decline, prompting companies to cut staff at the fastest pace in almost a decade, Reuters reports.
