Chinese factories are feeling the heat as US and European demand slows

Pictured here on June 24, 2022, are workers making umbrellas in a factory in Jinjiang city, Fujian province, China.

Yuan He | Future Publishing | beautiful pictures

European sales for Guangdong-based coffee machine company HiBrew have dwindled after the pound fell last year as pent-up global demand spurred purchases of Chinese consumer goods. .

Sales have fallen 30% to 40% this year, in sharp contrast to the 70% growth in business last year, according to General Manager Zeng Qiuping, according to General Manager Zeng Qiuping.

The rising cost of living in the US and Europe as well as importers awaiting tariff cuts between the US and China have contributed to the economic downturn, Zeng said. But he is optimistic that the current lull is only a blip and overseas demand will return.

While HiBrew didn’t sell much to the US, Zeng said fellow exporters told him orders from the US were also dwindling.

In addition, freight costs are starting to fall after rising to record levels during the pandemic, signaling that demand for logistics needed for deliveries is growing, analysts said. .

That is good news for exporters and importers, but there is another sign.

While traders previously had to deal with supply chain fluctuations and bottlenecks, they may now need to grapple with falling demand, especially in advanced economies. Analysts warn that these dynamics suggest recessionary pressure.

In effect, spot ocean freight rates between China and the east and west coasts of the US have fallen, said Shabsie Levy, founder of Shifl, a digital supply chain platform.

He attributed the drop to a drop in consumer demand in the US and said many US retailers are sitting in a surplus of inventory.

Ocean freight rates are intrinsically linked to the retail industry, he added, as ocean freight accounts for more than half of all goods imported into the country.

I wouldn’t call this drop in demand a recession, but things seem to be heading towards troubled waters.

Shabsie Levy

Founder, Shifl

“Low retail demand has dragged down spot ocean freight rates and so on,” said Levy. “I wouldn’t call this drop in demand a recession, but things seem to be heading towards the troubled waters.”

“In a word, some customers are experiencing a drop in sales, especially in some high-value and less essential items.”

During the pandemic, transportation costs have skyrocketed due to supply chain disruptions and outages.

Shifl said that spot sea freight rates between China and the US were nearly 3.5 times higher between January 2020 and May this year.

A cargo ship docked at the Port of Miami on June 9, 2022 in Miami Beach, Florida.

Joe Raedle | beautiful pictures

Higher logistics costs were absorbed by manufacturers or passed on to consumers, increasing inflation.

But for now, new import orders from the US have slowed, and businesses like Samsung US, the seventh-largest importer into the US, have halved their planned inventory orders for July, according to a recent report. Shifl’s data.

According to Shifl, the second largest US importer, Target also announced its intention to cut inventory orders due to high inventories.

Even after the Shanghai embargo was lifted, shippers received a lukewarm response from importers, Levy said.

Excess inventory

Composite World Container Index of Breweriestracks the cost of shipping 40-foot containers on major routes, which have fallen more than 30% since September.

Container shipping costs on major routes – such as Shanghai to New York and Shanghai to Rotterdam – have fallen by as much as 24% compared to last year.

Marc Levinson, an independent economist, said on LinkedIn: “The US distribution system is cramped. Inventories in April were up nearly 18% from a year ago.”

“The reason for the excess inventory? Simply put, consumers have stopped spending with abandon. As shopping habits return to pre-pandemic norms, inflation dents purchasing power and Sales at home have stagnated, demand for consumer goods has also stagnated.”

Levinson says the trend is visible in Europe, North America and parts of Asia.

Impact on spending

Economists are seeing difficulties in demand and spending.

As the cost of staples like food and water increases, American consumers won’t have much left to spend, especially on discretionary items, said Nathan Sheets, chief global economist at Citi. , told CNBC’s “Squawk Box” on Friday.

We think slowing trade or normalizing demand will lead to a significant slowdown in global growth.

Ariane Curtis

Global Economist, Capital Economics

“My feeling is that consumers, especially lower-income consumers, are starting to crack. We’re seeing that in discretionary consumers,” he said.

Capital Economics director of Global Economic Services, Jennifer McKeown, said there are signs that commodity spending is currently “flattening” across various advanced economies, said in a note on Thursday. end of June.

While consumers Still spending on services like dining – which is picking up again as lockdowns ease – demand for goods “is adversely affected by high prices and the relatively strong shift away from interest rates,” McKeown said. higher to spending on perennial consumables”.

Yung-Yu Ma, chief investment strategist at BMO Wealth Management, agrees.

Demand for goods faces a “triad” – a shift in consumer spending on services, inflation straining the budget and fears of a recession, Ma said. .

“If the economic downturn is not too steep or prolonged, perhaps next spring, the supply and demand situation will be better matched,” Ma said.

“A longer recession would entail even longer inventory adjustments.”

Capital’s global economist, Ariane Curtis, said in another note.

Weaker global demand for final goods, due to a gradual normalization of spending patterns, lower real incomes and higher interest rates, will be a headwind for world trade, Curtis said. world in the coming months”.

But she told CNBC that she doesn’t expect a global recession.

“We think slowing trade or normalizing demand will lead to a significant slowdown in global growth,” she said.

“It won’t return to the pre-COVID state of things amid tight costs of living and ongoing supply shortages, but it also won’t be quite a recession, at least not.” must be in most countries.”

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