Exposure rates of the Dorval Asset Management Range – 10th September 2021

If countries manage to get a full grip on the Delta variant, the output-price mix in the global recovery should finally start to pick up over the months ahead, particularly in manufacturing, where rising prices reflect sometimes massive bottlenecks.

The manufacturing sector was the first to get back on an even keel after the knock in Spring 2020, as production facilities stopped running for only a short spell and home deliveries helped preserve demand, even during lockdown phases. Additionally, Asia – a crucial cog in manufacturing value chains – successfully managed to keep the pandemic reasonably under control for quite some time, thereby curbing disruptions. However, this strong momentum has slowed sharply since the start of this year, leaving manufacturing output short of its previous peak in 2018 across several countries (cf. chart 1). 

 

 

The manufacturing recovery has stagnated since early 2021
manufacturing output, base 100 in 2018

United States / Europe (Germany, France & Italy)

 

Manufacturing company surveys confirm that this slowdown is most certainly mainly due to supply-side restrictions, rather than hindrances to demand (cf. chart 2). A number of trends have merged to trigger recent bottlenecks. The sudden surge in demand after phases of lockdown led to disruptions in supply chains, while more recently, the fallout from the Delta variant has then hampered supply from Asia since the Spring of 2021, as demonstrated by the sharp drop in manufacturing PMI. Additionally, the energy transition has fueled extra structural demand for certain products – electric vehicles for example – requiring investment in capacity in many key industries, such as semi-conductors.

 

 

Manufacturing output still curbed by supply
Euro area manufacturing sector survey

% of companies reporting that they had to restrict output due to supply problems (equipment and labor)
% of companies reporting that they had to restrict output due to insufficient demand

 

These trends have driven price hikes (cf. chart 3), which are a natural knock-on effect of inadequate supply set against high demand. With the Delta variant gradually coming under control – and if this is confirmed – two factors should help offset some of this tension over the months ahead: bottlenecks triggered by the sudden surge in demand in developed markets will ease, with demand returning to a steadier pace; meanwhile the sharp recent drop in Covid-19 case numbers in Asia and speedier progress on vaccination programs should help normalize both output and distribution.

 

 

Rise in producer prices could soon begin to slow
United States, producer prices – prices of finished products excl. food and energy

Index / Annualized change over 3 months

 

The beginnings of a gradual easing in prices in the near future would therefore be coherent, as well as an uptick in manufacturing output. This positive momentum would no doubt have kicked in earlier had the Delta variant not raised its ugly head, but that does not mean that it will not materialize at all. With this in mind, we have resumed our international portfolios’ exposure to the Asian manufacturing sector over recent weeks (Japan, emerging markets index).

 

 

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