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China’s factories are feeling some heat as demand in the US and Europe slacks

Pictured here on June 24, 2022 are workers making umbrellas at a factory in Jinjiang city, Fujian province, China.

Yuan He | Future Publishing | Getty Images

European sales of Guangdong-based coffeemaker maker HiBrew fell after sterling’s appreciation last year as pent-up global demand boosted purchases of Chinese consumer goods.

According to general manager Zeng Qiuping, sales have declined 30% to 40% so far this year, a sharp contrast to last year’s 70% business growth.

Soaring living costs in the US and Europe and importers waiting for potential US-China tariff cuts contributed to the downturn, Zeng said. But he is optimistic that the current doldrums are just a blip and overseas demand will return.

While HiBrew doesn’t sell much to the US, Zeng said export peers tell him orders from the US have also dropped.

Regardless, freight costs are now starting to fall after rising to record levels during the pandemic, suggesting demand for the logistics needed for deliveries is brewing, analysts say.

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

While retailers used to have to deal with bottlenecks and supply chain disruptions, they may now have to contend with falling demand, particularly in developed economies. Those dynamics point to recessionary pressures, analysts have warned.

In fact, spot ocean freight rates between China and the U.S. East and West Coast have fallen, said Shabsie Levy, founder of Shifl, a digital supply chain platform.

He attributed the declines to falling consumer demand in the US and said many US retailers are sitting on excess inventory.

Ocean freight rates are inextricably linked to retail, as ocean freight accounts for over half of all imports into the country, he added.

I wouldn’t call this drop in demand a recession just yet, but things seem to be heading into choppy waters.

Shabsie Levy

Founder, Schifl

“Slowing retail demand has pushed ocean freight rates down and continues to do so,” Levy said. “I wouldn’t call this drop in demand a recession just yet, but things seem to be headed for choppy waters.”

“On an anecdotal level, some customers are experiencing a drop in sales, particularly on certain high-value items and non-essential items.”

During the pandemic, shipping costs rose due to supply chain disruptions and lockdowns.

China-US spot sea freight rates were nearly 3.5 times higher between January 2020 and May this year, Shifl said.

A cargo ship docks at Port Miami on June 09, 2022 in Miami Beach, Florida.

Joe Raedle | Getty Images

The higher logistics costs were either absorbed by manufacturers or passed on to consumers, driving up inflation.

But now new import orders from the US have slowed and companies like Samsung US, the seventh-largest importer to the US, has halved its planned July stock order, according to Shifl data.

The second-largest US importer, Target, also announced its intention to cut stock orders because of exploding inventory, according to Shifl.

Even after the lockdown was lifted in Shanghai, shippers got a lukewarm response from importers, Levy said.


Drewry’s composite World Container Index, which tracks the cost of freighting 40-foot containers on major routes, has fallen more than 30% since September.

The cost of containers on key routes – like Shanghai to New York and Shanghai to Rotterdam – has fallen by up to 24% year-on-year.

“The US distribution system is jam-packed with stuff. Corporate inventories in April were almost 18% higher than a year ago,” said Marc Levinson, an independent economist, on LinkedIn.

“The reason for the excess inventory? Simple enough, consumers have stopped spending happily. As shopping habits return to pre-pandemic norms, inflation erodes purchasing power and home sales falter, demand for consumer goods has also stagnated.”

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

Impact on spending

Economists see demand and spending headwinds.

As the cost of staples like groceries and utilities rises, U.S. consumers are running out of things to spend on, particularly non-durable items, Nathan Sheets, Citi’s chief global economist, told CNBC’s Squawk Box on Friday.

We believe that a slowdown in trade or normalization in demand will result in a significant slowdown in global growth.

Ariane Curtis

Global Economist, Capital Economics

“My feeling is that consumers, particularly low-income consumers, are starting to crack. We’re seeing that in consumer discretionary,” he said.

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

While consumer still spend on services like food — which are making a comeback as lockdowns ease — demand for goods “is being adversely affected by high prices and by the relatively strong carry-over of higher interest rates to spending on consumer durables,” McKeown said.

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

Demand for goods is facing the “triple whammy” — that is, shifts in consumer spending toward services, inflationary budgets and recession concerns, Ma said.

“Unless the economic downturn is steep or protracted, supply and demand should probably be better matched by next spring,” Ma said.

“A more protracted downturn would delay the inventory correction even longer.”

Rising rates won’t help either, Ariane Curtis, Capital’s global economist, said in another note.

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

But she told CNBC she doesn’t expect a global recession.

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

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