What's going on?
Data out on Monday showed that UK manufacturing activity fell to a six-year low last month – and things aren’t looking much better around the rest of the world.
What does this mean?
UK factories have been hit by a double whammy. Exports declined in June as overseas buyers braced for lower economic growth ahead – with continued uncertainty over global trade conditions playing a big part. And domestic demand also fell last quarter: the proportion of UK firms reporting growth in UK orders was the smallest in nearly seven years. Britain’s delayed departure from the European Union has led to a reversal of the stockpiling trend seen earlier this year.
And despite record temperatures, the rest of Europe isn’t looking too hot either. Factory activity in the eurozone was worse than expected in June, contracting for the fifth month in a row. And Spanish manufacturing shrank at its fastest pace since 2013.
Why should I care?
The bigger picture: The means of production mean more to China.
US manufacturing growth may have shown a slight improvement in June compared to May – but it was still some of the worst in years. And Chinese industry shrank. In the eurozone, US, and UK, manufacturing is a relatively small piece of the economic puzzle: the dominant “services” sector may well have compensated for factories’ woes and generated at least some economic growth in the second quarter. But in China, the world’s largest manufacturer, heavy industry makes up 29% of the economy – twice the global average. Yet more government support may now be needed to help China meet its already-lowered growth targets.
For markets: All eyes on central banks.
Slowing economic growth may soon provoke central banks into wielding their interest rate superpowers. Rates in the US and eurozone are expected to be cut soon – making borrowing cheaper and encouraging investment in business growth. That could stimulate manufacturing orders and lead to greater economic growth overall.