According to the “Japan Economic News” reported on August 8, global commodity demand is falling. According to the manufacturing-related index, 70% of the world’s 29 major countries and regions are contracting business activity. The supply chain balance has been disrupted by commodity shortages on a scale comparable to the Lehman crisis in 2008. A shift in consumption from goods to services and sluggish demand in Asia are also having an impact. Whether the service sector alone can support huge employment has become a focus.

According to the Japan Maritime Center, since 2023, the number of shipping containers sent from Asia to the United States has fallen by 20% to 30% year-on-year. A major container shipping company said that while demand exists, retailers’ excess inventory has not been absorbed enough to drive new production increases and shipments.

Supply chain constraints that put inflationary pressure on the world have all but been lifted. The adjustment of epidemic prevention policies in East Asia has greatly contributed to the return of economic activity to normal. For the manufacturing industry, this is conducive to the improvement of production processes such as parts procurement. However, at present, this positive factor is not fully utilized, because of the lack of real demand.

Market participants pay close attention to the Global Supply Chain Stress Index (GSCPI) released monthly by the Federal Reserve Bank of New York. It is calculated based on sea freight costs as well as supply chain related items in the Purchasing Managers’ indices (PMIs) of major countries. It is based on zero, and a positive value indicates that the supply chain is tighter than normal, and there are supply constraints. A negative value indicates that reduced demand leads to fewer goods available for transport, disrupting the supply and demand balance in the supply chain.

The GSCPI for July, released on August 4, was -0.9, below 0 for six consecutive months. In May this year, the index was close to the all-time low of -1.59 set in November 2008. With the Lehman crisis, the U.S. economy fell into recession, financial institutions had no room to lend, and demand for durable consumer goods such as cars evaporated.

Demand for goods has surged as the coronavirus pandemic has driven home spending. The US Standard & Poor’s global commodities company shipping analysis survey experts pointed out that the end of the epidemic has shifted people’s consumption pattern from goods to travel and other services, which has a greater impact on the current decline in demand.

In addition, some believe that the monetary tightening policies of central banks in advanced countries are also to blame. Central banks’ aggressive lending during the pandemic has inflated asset prices and fuelled overconsumption. Now aggressive interest rate hikes have led to a credit contraction, causing demand to fall.

Domestic demand in Asia is recovering less than expected. French cosmetics giant L ‘Oreal’s chief executive, Ye Hongmo, said at an earnings call in July that sales in some Asian countries had yet to return to pre-pandemic levels.

Weak demand for goods has led to weakness in global manufacturing.

The Institute for Supply Management announced that the U.S. PMI in July was 46.4, although it improved from the previous month, but it has been below the 50-point line for nine consecutive months, setting the longest contraction cycle since the 2008 financial crisis. Orders for electronic equipment and chemicals continued to be weak.

The S&P Global manufacturing PMI for July has been below 50 for 11 consecutive months, second only to the post-Lehman recession. In 29 major countries and regions, 70 percent of the PMI is below 50, indicating a contraction in business activity. The situation was particularly grim in Europe, where the PMI for Germany, the region’s largest economy, was just 38.8, well below the line between expansion and contraction.

In the second quarter of 2023, German chemical giant BASF’s main customers, other than the automotive industry, saw demand fall sharply. ‘It’s not going to happen in the second half like China did during the financial crisis [with massive fiscal stimulus],’ executive board chairman Richard Brudermuller said at an earnings conference in July. The company recently cut its full-year 2023 earnings forecast.

Japan’s manufacturing PMI came in at 49.6 in July, falling below 50 for two months in a row. An easing of the semiconductor shortage has revived car production. But Japan’s listed companies, whose performance is generally good, cannot escape the impact of falling external demand.

The service sector is now the engine of the global economy and the US economy. It leads to an increase in the size of employment, and the risk of an immediate recession is low. But if the lack of demand and weakness in manufacturing persist, can services alone support the real economy? Fears of recession have not been dispelled.