The increased likelihood of “higher for longer” interest rates for the Developed Economies (and, by proxy, ex-China Developing ones) has been the most important factor behind the current “global economic chill.” Many groups – especially in the real estate sector and increasingly on the consumer side – are beginning to feel the impact of higher interest rates and, as a consequence, are paring back their purchases of durable goods and reducing investment, respectively. In fact, an investment recession, that includes inventory reductions, is probably already in effect because so many industrial companies are delaying some portion of their capital spending programs pending more clarity about the outlook.
Another reason for the reduced economic activity, WSD thinks, is the reversal of undetected excesses that were created during the post-Covid economic recovery from late-2020 to early 2022 and prolonged by the Russia/Ukraine war into early-2023. These excesses, theoretically speaking, are now being reversed by the Invisible Hand – i.e., price allocates resource. Here is a possible example. Too much material may have been accumulated in manufacturers’ work-in-process – which is now being cut back (and, for those in the steel marketplace, feels like a steel buyers’ inventory reduction) as producers and buyers over-bought and over-produced during the seemingly perpetual shortages of 2021-2022. From the viewpoint of steel inventories, the onset of the Russia/Ukraine war in early-2022 likely created a second wave of excess as buyers, panicked about another wave of supply disruptions, purchased large volumes of steel products on the world market.
Early evidence of these phenomena is becoming visible via preliminary apparent steel demand calculations for select countries outside of China. Based on partial-year 2023 steel import/export data and juxtaposed with reported steel production, WSD estimates that ASC in a number of major Developed and Developing countries ex-China is down about 3.5%.
Purchasing manager sentiment – the PMI – has turned negative in the USA, Japan and Europe. And, in China, the steel industry’s PMI has fallen to just below 50.0, indicating that activity is contracting. Below is a comparison chart between the USA and China manufacturing PMI.
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