Column: The global economic cycle is starting to slow down


An aerial view shows containers and cargo ships at the port of Qingdao in Shandong province, China May 9, 2022. China Daily via REUTERS

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LONDON, June 30 (Reuters) – Global manufacturing activity and freight movements have started to slow as major economies slump under the combined impact of inflation, lockdowns, sanctions and rising tariffs. interest rate.

According to the Dutch Bureau for Economic Policy Analysis (CPB), global industrial production in the three months between February and April was only 3.75% higher than in the corresponding period of the previous year.

Growth has gradually slowed after peaking at almost 15% in the first quarter of 2021, as major economies rebounded from the first wave of the coronavirus pandemic (“World trade monitor”, CPB, June 24).

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In absolute terms, output appears to have peaked in February, then started to decline as China locked down several major cities and sanctions and soaring inflation hit consumer and business spending in Europe.

Surveys of purchasing managers in the United States, the euro zone and China all show that the expansion of business activity is losing steam or even contracting in China in the second quarter.

Freight movements appear to have peaked even earlier, around December, and have been on a downward trend since the start of the year.

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Global trade volumes rose 3.76% in February-April from the same period a year earlier, a relatively slow rate of growth.

But the most recent data shows that volumes fell 0.3% in February-April compared to November-January, even after seasonal adjustments.

By this measure, volume growth is only in the 10th percentile for all periods since 1991, implying that a significant slowdown is already underway.

South Korea’s KOSPI-100 stock index contains a large number of export-oriented manufacturing companies and has been closely correlated with the business cycle over the past two decades.

The KOSPI-100 has continued to decline in recent months and is now down 30% from the same time last year, indicating that trading volumes likely fell further in May and June.

The slowdown is both necessary (capacity constraints have become binding in a growing number of industries) and intentional (central banks have engineered a significant tightening of financial conditions to calm inflation).

As the slowdown progresses, it will restore unused capacity in a number of industries and rob at least some manufacturers and transportation companies of their pricing power, possibly causing inflation to decelerate.

In oil, the main impact will be felt in diesel, the fuel used by industrialists, road hauliers, railways and shipping companies.

U.S. inventories of diesel and other distillate fuels rose after hitting a 17-year low in early May, according to high-frequency data from the U.S. Energy Information Administration.

Part of the increase is seasonal, as refineries ramp up crude processing to produce more gasoline for the summer driving season (“Weekly oil status report,” EIA, June 29).

But some of the inventory build likely reflects subdued demand as manufacturing and freight slow and higher prices force fuel savings.

U.S. distillate inventories rose more than 8 million barrels in the past seven weeks, the fastest seasonal increase since 2008, excluding pandemic-induced distortions in 2020.

The more or less continuous erosion of distillate stocks since September 2020 seems to have stopped in May and June 2022.

Manufacturing, freight and diesel data are all consistent with a slowdown in the global economic cycle already underway – centered on China and Europe, but likely to spill over to North America in the coming months .

Associated columns:

– Diesel demand set to fall as economies slide into recession (Reuters, June 23) read more

– Soaring oil prices show economic cycle slowdown is inevitable (Reuters, June 14) read more

– Economic war pushes business cycle to tipping point (Reuters, March 23) read more

– Western economies on brink of recession as sanctions on Russia escalate (Reuters, March 8) read more

John Kemp is a market analyst at Reuters. Opinions expressed are his own.

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Editing by Emelia Sithole-Matarise

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.


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