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Global Factories Pay Higher Prices as Surge Strains Supplies

A surge in factory output is testing already strained global supply chains, raising prices of raw materials and other inputs at the fastest pace in a decade as manufacturers and their customers are forced to wait longer for their goods to arrive.

The recovery in global factory output from a pandemic-driven collapse started in May, and output had returned to its pre-lockdown level by December, faster than many had expected, including manufacturers themselves.

But with output continuing to rise above pre-pandemic levels, manufacturers in most countries report lengthening delivery times for raw materials and other inputs, as well as increasing backlogs of work they themselves have yet to complete, and a sharp pickup in input prices.

In Germany, one of the world’s manufacturing powerhouses, one of a number of surveys carried out by data firm IHS Markit recorded the sharpest increase in output since the series began in 1996. That is good news for the European economy, which continues to be held back by rising infections and a faltering vaccination campaign.

Over the past six months, Europe’s economy has moved at two speeds. While manufacturing has expanded at an increasingly rapid pace, activity in the larger services sector has declined. Overall, from October to February there was a contraction in output that likely saw the eurozone slide into recession during the final quarter of last year and the first quarter of this.

But to the surprise of most economists, that changed in March, with manufacturing proving so strong that another decline in services wasn’t enough to prevent a return to overall growth. However, that return to growth may not be sustained, since both France and Germany have imposed new restrictions on consumers and businesses in recent weeks and there are few signs of an imminent pickup in vaccinations.

“This two-speed nature of the economy will likely persist for some time to come, as manufacturers benefit from a recovery in global demand but consumer-facing service companies remain constrained by social distancing restrictions,” said Chris Williamson, IHS Markit’s chief business economist.

IHS Markit’s composite Purchasing Managers Index for the eurozone rose to 52.5 in March from 48.8 in April. It was the first month in which the measure was above the 50.0 threshold that distinguishes a decline from an increase in private-sector activity since September.

The manufacturing sector’s PMI jumped to 62.4 from 57.9, hitting a record high. At the same time, the services PMI remained below 50.0, pointing to a further decline in activity, albeit the smallest in seven months.

For much of the rest of the global economy, the recovery is less lopsided. But in most places, manufacturers have rebounded more strongly than service providers, reflecting the fact that most goods can be consumed with relatively little risk of infection, while a range of services led by hospitality and entertainment remain risky.

In Australia, manufacturers reported the sharpest rise in import prices in the survey’s history, and attributed that to bottlenecks in their supply chains. Across the eurozone, factory managers reported the fastest rise in input prices in a decade, and reported the longest waiting times for inputs to be delivered in the survey’s 23-year history. In particular, German manufacturers highlighted lengthening waiting times for supply from Asia.

Surveys for the U.S. to be released later Wednesday are likely to point to similar pressures on supplies. According to a separate survey released by the Federal Reserve Bank of Richmond, manufacturers in its district reported a jump in delivery times during March, and face the longest wait in the survey’s 25-year history.

In Europe, manufacturers have responded to increased demand by recruiting additional workers at the fastest pace since August 2018, which should help aid the services sector’s recovery when businesses are allowed to reopen fully. But the rise in raw materials costs points to higher prices for consumers over coming months, a problem central bankers see as short-lived for now.
Source: Dow Jones

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