Chinese factories are feeling some heat as demand in the US and Europe slows

Pictured here on June 24, 2022, workers make umbrellas at a factory in Jinjiang City, Fujian Province, China.

Yuan He | Publishing in the future | Getty Images

European sales of Guangdong-based coffee maker HiBrew slumped after a surge in sterling last year when pent-up global demand drove purchases of Chinese consumer goods.

Sales are down 30% to 40% so far this year, in sharp contrast to business growth of 70% last year, according to general manager Zeng Qiuping.

Zeng said the rising cost of living in the United States and Europe as well as importers awaiting potential tariff cuts between the United States and China contributed to the downturn. But he is optimistic that the current calm is just a passing picture and that external demand will return.

While HiBrew doesn’t sell much to the United States, Zeng said fellow exporters tell him that orders from the United States have also dwindled.

Separately, freight costs are starting to fall now that they have jumped to record levels during the pandemic, suggesting that demand for the logistics needed for deliveries is boiling, analysts say.

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

While traders previously had to deal with supply chain bottlenecks and disruptions, they may now need to contend with lower demand especially in advanced economies. Analysts cautioned that these dynamics point to recessionary pressures.

In fact, spot ocean freight rates between China and the east and west coasts of the United States are down, said Chapsey Levy, founder of Shifl, a digital supply chain platform.

surplus inventory

Drewry’s Global Composite Container Indexwhich tracks costs for shipping 40-foot containers on major routes, has fallen more than 30% since September.

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

“The US distribution system is full of things,” Mark Levinson, an independent economist, said on LinkedIn. “Business inventories in April rose about 18% compared to a year ago.”

“Why is inventory overstocking? Simply enough, consumers have stopped spending while giving up. With shopping habits returning to pre-pandemic standards, inflation eliminating purchasing power, and home sales stalling, consumer demand is also slowing.”

The trend was evident in Europe, North America and parts of Asia, Levinson said.

Impact on spending

Economists see headwinds in demand and spending.

With costs for staples like food and utilities rising, there isn’t much left for American consumers to spend on, especially discretionary items, Citi’s chief global economist Nathan Sheets told CNBC’s “Squawk Box” on Friday.

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

Ariane Curtis

Global Economist, Capital Economics

“My sense is that consumers, especially lower-income consumers, are starting to collapse. We see that in consumer appreciation,” he said.

There are indications that spending on goods is now “levelling” across advanced economies, Jennifer McKeown, head of global economics service at Capital Economics, said in a note at the end of June.

While consumers They are still spending on services like dining — which is making a comeback as lockdowns ease — as demand for goods is “negatively affected by higher prices and the relatively strong passage from higher interest rates to spending on consumer durables,” McKeown said.

Yong Yu Ma, chief investment strategist at BMO Wealth Management, agreed.

Ma said demand for goods is facing a “triple whammy” – shifts in consumer spending toward services, inflation straining budgets and fears of a recession.

“If the economic downturn is not severe or prolonged, it is likely that by the spring of next year the supply and demand situation will be better matched,” Ma said.

“A more prolonged downturn would drag the stock correction for a longer period.”

On another note, higher interest rates won’t help either, said Ariane Curtis, global economist at Capital.

“Weakening final global demand for goods, due to gradual normalization in spending patterns, lower real incomes, and higher interest rates, will act as headwinds for global trade in the coming months,” Curtis said.

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

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

“It won’t go back to a pre-COVID situation against the backdrop of cost-of-living pressures and ongoing supply shortages, but it won’t be a recession either, at least not in most countries.”