China’s factories are feeling a bit warm as US, Europe’s demand declines

Pictured here June 24, 2022 are workers making umbrellas at a factory in the city of Jinjiang, Fujian Province, China.

Yuan He | Future Publishing | Getty pictures

European sales for the Guangdong-based coffee machine company HiBrew have declined after a sharp rise last year when pent-up global demand drove up purchases of Chinese consumer goods.

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

Rising living costs in the US and Europe as well as importers waiting for potential tariff cuts between the US and China contributed to the decline, Zeng said. But he is optimistic that the current stalemate is just a blink away, and demand from abroad will return.

While HiBrew does not sell much to the US, Zeng said other exporters tell him that orders from the US have also decreased.

Individually, shipping costs are starting to fall now after rising to record levels during the pandemic, signaling that demand for logistics needed for deliveries is starting to boil, analysts say.

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

While traders previously had to deal with congestion and upheavals in the supply chain, they may now have to deal with falling demand, especially in developed economies. This dynamic points to a recessionary pressure, analysts warned.

In fact, spot prices for ocean freight between China and the east and west coasts of the United States have fallen, said Shabsie Levy, founder of Shifl, a digital supply chain platform.

He attributed the decline to declining consumer demand in the US and said that many US retailers are sitting on excess inventory.

Sea freight rates are inherently linked to retail trade, as sea freight accounts for more than half of all imports to the country, he added.

I would not call this reduction in demand a recession yet, but things seem to be heading for troubled waters.

Shabsie Levy

founder, Shifl

“Falling retail demand has dragged down freight rates for ocean pots and continues to do so,” Levy said. “I do not want to call this reduction in demand a recession yet, but things seem to be heading for troubled waters.”

“On an anecdotal level, some customers experience a drop in sales, especially for certain high-value items and less important items.”

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

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

A cargo ship is located at Port Miami on June 9, 2022 in Miami Beach, Florida.

Joe Raedle | Getty pictures

The higher logistics costs have either been absorbed by producers or passed on to consumers, which drives up inflation.

But now new import orders from the US have declined and companies such as Samsung US, the seventh largest importer to the US, have halved their planned stock order for July, according to Shifl data.

The second largest US importer, Target, also announced its intentions to cut orders in stock due to balloon inventory, according to Shifl.

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

Excess inventory

Drewry’s composite World Container Index, which tracks shipping costs for 40-foot containers on major routes, has fallen more than 30% since September.

The cost of containers across major routes – such as Shanghai to New York and Shanghai to Rotterdam – has fallen by up to 24% compared to last year.

“The U.S. distribution system is crammed with things. Corporate inventories in April increased nearly 18% from a year ago,” Marc Levinson, an independent economist, said on LinkedIn.

“The reason for the excess inventory? Simple enough, consumers have stopped using with abandonment. As shopping habits return to pre-pandemic norms, inflation decimates purchasing power and home sales stop, so does the demand for consumer goods.”

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

Impact on expenditure

Economists see headwinds in demand and spending.

As the cost of staples such as food and tools increases, there is not much left for American consumers to spend on, especially discretionary goods, Nathan Sheets, Citi’s global chief economist, told CNBC’s “Squawk Box” on Friday.

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

Ariane Curtis

Global economist, capital economics

“My feeling is that consumers, especially low-income consumers, are starting to crack. We see it in the consumers’ judgment,” he said.

There are signs that commodity consumption is now “flattening out” across various advanced economies, Capital Economics’ head of the Global Economics Service, Jennifer McKeown, said in a note at the end of June.

While consumers continues to use services such as catering – which is making a comeback as shutdowns ease – demand for goods is “negatively impacted by high prices and by the relatively strong transition from higher interest rates to use on durable consumer goods,” McKeown said.

BMO Wealth Management Chief Investment Strategist Yung-Yu Ma agreed.

Demand for goods is facing “triple cruelty” – that is, changes in consumer spending on services, inflation-tight budgets and concerns about the recession, Ma said.

“If the economic downturn is not steep or prolonged, the supply and demand situation should probably be better adapted to the spring of next year,” said Ma.

“A more prolonged downturn will drag out the inventory correction even further.”

Rising interest rates will not help either, Capital’s global economist Ariane Curtis said in another note.

“Weaker global final demand for goods, due to a gradual normalization in consumption patterns, lower real incomes and higher interest rates, will be a headwind for world trade in the coming months,” Curtis said.

But she told CNBC she did not expect a global recession.

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

“It will not be back to normal before COVID, given the backdrop of tight living costs and ongoing supply shortages, but there will not be a complete recession either, at least not in most countries.”

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