As always, until the United States powers that be recognize that their reports are complete trash and that indeed inflation is surging at far greater levels than their reports indicate, we will still be in denial.
As always, the facts refute everything the powers that be say.
- Soaring commodity costs are denting manufacturing activity in Asia and Europe and the outlook looks bleak as new orders drop off in the face of rising prices, surveys showed on Tuesday.
- Manufacturing activity in the euro zone contracted in June for the first time in three years while business confidence in Asia's largest export markets is buckling and output has likely contracted further in the United States.
- Factories worldwide have struggled in the face of soaring raw material and energy costs -- oil hit over $143 a barrel on Monday.
- Meanwhile, the Bank of Japan's tankan corporate index of big manufacturers' sentiment dropped to plus 5, from 11 in March, showing their mood has not been darker since 2003. Even Japanese manufacturers, which have long struggled to pass on costs, pushed up prices in the last quarter, although not fast enough to offset a rise in costs and to keep profits growing, the tankan showed. "That could indicate more inflationary pressures in the pipeline," said Magnus Prim, chief Asia currency strategist at SEB in Singapore. "They're getting squeezed on the profit side and see no alternative but to pass on price increases."
- The picture of slowing growth and spiraling prices applied to Britain too. The UK's manufacturing sector saw output and new orders fall at their fastest rate in almost a decade. But there was no let-up in inflationary pressures with input costs and output prices both rising at the fastest rate since the series began.
- China and India are battling their fastest inflation this decade. (long predicted in the blog)
- Chinese firms warned they were passing rising costs on to consumers, which could hurt domestic demand, and struggling to export because of weak global markets, two PMI surveys showed. The measure for input prices paid by China's manufacturers rose to its highest since the PMI survey was launched in 2005. Domestic and export orders fell to their lowest since January.
- A separately published PMI from brokerage CLSA showed output prices rose at their fastest pace in four years.
Interesting to see this inflation scenario literally exploding across the country. I always find the story of China interesting because it is poised to be a world superpower on demographics alone. However, I read even 2 years ago that China is starting to become 'expensive' for manufacturers, and now companies are looking for the next cheapest place, i.e. Vietnam. Which is quite amazing. I remember all the NAFTA talk in the 90s and how companies were moving to Mexico en masse for low cost labor - $2.50 or so in US wages. Within a decade much of those factory towns are now ghost towns, as that capital moved to Asia. Can we imagine a time in 15 years when China is too expensive? It could happen. Especially with the need to add more layers of safety, what with toothpaste, dog food, lead in toys, etc etc etc.
So this has been coming to pass the past half years. The Wall Street Journal spoke about it yesterday. I've teased many times the world's multinationals will soon find Chinese making 60 cents an hour (up from 20 cents an hour) as unreasonable and run off to the next place to exploit labor - be it Vietnam, Indonesia or wherever. Aside from the strengthening yuan, minor things like "safety" or "quality control" (dog food anyone?) are obvious culprits that would force prices for Chinese goods to go up, from the time when it was a Wild Wild West atmosphere and things like safety/quality control mattered little.
- But the economy of sweater town is unraveling, providing an early sign that China's manufacturing sector may be entering middle age. At the industry's height in recent years, more than half of Honghe's 100,000 residents worked in 100 factories and 8,000 shops that knitted, dyed, packaged and shipped some 200 million sweaters a year. The local government says the enterprises brought in $650 million a year in revenue.
- Now many exporters and workshops here have shut their doors. Others, their work floors partly idle, are cutting costs. Some of the migrant workers who came here for jobs are returning home.
- Manufacturers say their profits have dwindled as they pay out more for raw materials and energy. China's strengthening currency has made Honghe's products more expensive for important markets such as the U.S., where the price of Chinese goods surged a record 4.6% in May from the previous year, according to the U.S. Commerce Department.
- Beijing, too, has contributed to the squeeze: Companies say the government's tougher protection for workers and the environment has made it more expensive to do business.
- Manufacturers of low-cost products have been a key engine of China's economic miracle, helping to turn the country into the world's No. 2 exporter after Germany. For years, these companies continued to grow by expanding their volumes and trimming margins to undercut the competition. As material and labor costs rise and China's currency strengthens, these manufacturers are among the least able to absorb the costs.
- The transformation is most apparent in the boomtowns that tied their fortunes to making one product cheaply, from Guangdong province in the south to Honghe's environs in the Yangtze River Delta. Many of these manufacturing centers have seen hundreds if not thousands of factories and workshops close in recent months, industry executives say. (that can't be a good thing for the "China miracle")
- While painful, such difficulties could usher in a more mature phase of China's economic development. The country's sweater industry, like many others, is arguably overbuilt: Honghe is one of at least six Chinese cities claiming to produce more than 100 million sweaters annually. In such low-cost sectors, analysts predict a coming wave of consolidation that could boost efficiency. They say companies will also be forced to innovate so they can compete on factors other than price.
- China, of course, is sure to remain an export powerhouse for many years. Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages. Plus, the country's roads and ports, and its spectrum of suppliers and businesses that support manufacturers, are a draw that few other developing countries can match.
- But with rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries, like India and Vietnam.
[February 28: China Raising Minimum Wage]
[February 21: Rising Factory Costs Erode China's Edge]
[February 3: China's Inflation Hits American Price Tags]
