Factories face soaring costs as Iran war causes supply shocks
Global Economic Impact and Factory Responses
By Jonathan Cable, Leika Kihara and Lucia Mutikani
Supply Chain Disruptions and Rising Costs
LONDON/TOKYO/WASHINGTON, June 1 (Reuters) - The economic shock from the Iran war hit European factories last month, suppressing demand for their goods and pushing up raw material costs at the fastest rate in four years, although their U.S. and Asian peers saw activity expand due to stockpiling with global supply chains under strain from the conflict, surveys showed on Monday.
The U.S.-Israeli led conflict, which began in late February, has upended trade, rattled financial markets and raised concerns over global energy and other commodity supplies, particularly through the Strait of Hormuz, a key route for oil and gas shipments.
Monday's surveys came after the heads of the International Energy Agency, International Monetary Fund, World Bank and World Trade Organization warned the war was straining global energy supplies.
European Factory Performance
S&P Global's Eurozone Manufacturing PMI fell to 51.6 in May from April's near four-year high of 52.2, but ahead of a preliminary estimate of 51.4.
A reading above 50.0 indicates growth.
"Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Country-Specific Impacts in Europe
In Germany, Europe's largest economy, the manufacturing sector stalled while French factories saw a contraction for the first time since November.
The European Central Bank will hike its deposit rate this month and at least once more this year to try to stop higher energy prices feeding into core inflation, according to a majority of economists polled by Reuters in May.
Official data due on Tuesday is expected to show inflation rose further above the ECB's 2% target last month.
British factories raised their prices at the fastest rate since June 2022 last month in response to a big increase in costs.
US and Asian Factory Buffers
US, ASIAN BUFFERS
Still, factory activity expanded in the United States and in most Asian economies.
United States Manufacturing Expansion
U.S. factory output hit the highest level in four years, likely driven by businesses front-loading orders amid rising prices and shortages because of the war.
The Institute for Supply Management's manufacturing purchasing managers index rose to 54.0 last month, the highest reading since May 2022, from 52.7 in April. New orders were the highest in four months with customers looking to build inventories as the survey showed supplier delivery times at the longest in four years. Input costs also remained elevated.
Asia's Manufacturing Growth
In Asia, China's private-sector gauge grew for a sixth straight month and South Korea's hit the fastest pace in five years, highlighting a region-wide push to build buffers against potential conflict-led disruptions.
The RatingDog China General Manufacturing PMI, compiled by S&P Global, fell to 51.8 in May from 52.2 in April, but was slightly better than analysts' forecast of 51.6.
That outcome contrasted with an official survey showing factory activity in the world's second-largest economy stalled last month as new orders contracted and input costs kept rising.
Country-Specific Trends in Asia
Japan's factory activity also expanded with the PMI at 54.5 in May, slowing from April's more than four-year high of 55.1, though firms there reported the sharpest rise in input costs since September 2022 due to higher raw material prices.
South Korea's PMI rose to its highest since March 2021 at 54.8 in May, up from 53.6, again underlining firms' drive to lock in supplies.
In Vietnam, the factory PMI gauge rose to 52.8 from 50.5, while Taiwan's rose to 56.1 from 55.3, surveys showed. The index for the Philippines jumped to 50.8 from 48.3.
Reporting Credits
(Reporting by Leika Kihara in Tokyo, Jonathan Cable in London and Lucia Mutikani in WashingtonEditing by Shri Navaratnam, Toby Chopra and Andrea Ricci )
