HomeBusinessChinese factories are feeling some heat as US and European demand slows

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

Pictured on June 24, 2022, workers make umbrellas at a factory in Jinjiang city, Fujian province, China.

Yuan He | Edition of the future | Getty Images

European sales of Guangdong-based coffee machine company HiBrew declined after a run in the pound last year when pent-up global demand pushed up purchases of Chinese consumer goods.

Sales have fallen 30% to 40% so far this year, a stark contrast to the 70% growth in business last year, according to chief executive Zeng Qiuping.

Rising costs of living in the United States and Europe as well as importers awaiting possible tariff reductions between the United States and China contributed to the slowdown, Zeng said. But he is optimistic that the current lull is only a blip and that foreign demand will return.

While HiBrew doesn’t sell much in the United States, Zeng said his fellow exporters have told him that orders from the United States have also fallen.

Separately, freight costs are starting to fall now after hitting record highs during the pandemic, signaling that demand for the logistics needed for deliveries is waning, analysts said.

This is good news for exporters and importers, but there is another red flag.

Where merchants previously had to deal with congestion and supply chain disruptions, they may now have to deal with lower demand, especially in developed economies. These dynamics point to recessionary pressure, analysts warned.

Indeed, spot ocean freight rates between China and the east and west coasts of the United States have plummeted, said Shabsie Levy, founder of Shifl, a digital supply chain platform.

He attributed the declines to lower consumer demand in the United States and said many U.S. retailers are sitting on excess inventory.

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

I wouldn’t call this reduction in demand a recession just yet, but things seem to be headed for troubled waters.

Shabsie Levy

Founder, Shifl

“The drop in retail demand has driven spot ocean freight rates down and continues to do so,” Levy said. “I wouldn’t call this reduction in demand a recession yet, but things seem to be headed for troubled waters.”

“Anecdotally, some customers are experiencing a drop in sales, particularly on certain high value items and less essential items.”

During the pandemic, shipping costs have increased due to supply chain disruptions and blockages.

Spot ocean freight rates between China and the United States were nearly 3.5 times higher between January 2020 and May this year, Shifl said.

A freighter sits in Port Miami on June 09, 2022 in Miami Beach, Florida.

Joe Raedle | Getty Images

Higher logistics costs were either absorbed by manufacturers or passed on to consumers, leading to higher inflation.

But now new import orders from the United States have slowed and companies like Samsung US, the seventh-largest importer in the United States, have halved their planned inventory order for July, according to data from Shifl..

The second-largest US importer, Target also announced plans to reduce inventory orders due to increased inventory, according to Shifl.

Even after Shanghai’s lockdown was lifted, shippers received a lukewarm response from importers, Levy said.

Excess inventory

Drewry’s Global Composite Container Index, which tracks freight costs for 40ft containers on major routes, has fallen more than 30% since September.

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

“The U.S. distribution system is full of stuff. Business inventories in April were up nearly 18% from a year ago,” Marc Levinson, an independent economist, said on LinkedIn.

“The reason for excess inventory? Quite simply, consumers have stopped spending with abandon. As shopping habits return to pre-pandemic norms, inflation is decimating purchasing power and sales houses are stagnating, the demand for consumer goods is also stagnating.”

Levinson said the trend was visible in Europe, North America and parts of Asia.

Impact on expenses

Economists see headwinds in demand and spending.

As the costs of basics such as food and utilities rise, U.S. consumers don’t have much left to spend, especially on discretionary items, Nathan Sheets, chief global economist at Citi, said Friday at ” Squawk Box” from CNBC.

We believe that a slowdown in trade or the normalization of demand will lead to a significant slowdown in global growth.

Ariane Curtis

Global Economist, Capital Economics

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

There are signs that spending on goods is “flattening” in various advanced economies, said Jennifer McKeown, head of the global economics department at Capital Economics, in a note in late June.

While consumers are still spending on services such as catering – which are making a comeback as lockdowns ease – demand for goods is “negatively affected by high prices and the relatively strong pass-through of higher interest rates to spending on durable consumer goods,” McKeown said.

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

Demand for goods is facing the “triple whammy” – meaning shifts in consumer spending towards services, inflation weighing on budgets and fears of recession, Ma said.

“If the economic downturn is not abrupt or prolonged, then probably by spring next year, the supply and demand situation should be better balanced,” Ma said.

“A longer downturn would prolong the inventory correction even further.”

Rising interest rates won’t help either, Ariane Curtis, Capital’s global economist, said in a separate note.

“The drop in global final demand for goods, due to a gradual normalization of spending habits, falling real incomes and rising interest rates, will be a headwind for global trade in the months to come. “, said Curtis.

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

“We believe that a slowdown in trade or the normalization of demand will lead to a significant slowdown in global growth,” she said.

“It won’t be a return to the pre-COVID state of affairs given the backdrop of squeezing living costs and continued supply shortages, but it won’t be quite a recession either, at least. not in most countries.”

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