The war has increased pressure on the global economy

S&P Global’s latest survey of global purchasing managers, published on April 23, shows that the world economy is under increasingly obvious pressure from the energy shock caused by the Iran war. Among them, 21 eurozone countries are most affected. This region’s purchasing managers index (PMI) decreased from 50.7 points in March to 48.6 points in April. PMI below 50 shows that manufacturing activity is shrinking.

Meanwhile, the index tracking input prices skyrocketed, from 68.9 points to 76.9. This shows that factories in Eurozome are facing increased production costs.

The eurozone’s service industry tracking index also fell below the 50 mark, to 47.4 points. This figure is lower than forecast Reuters is 49.8 points.

“The euro zone is facing growing economic consequences from the war in the Middle East. Supply shortages are spreading, threatening to drag down growth in this region, while increasing price pressure in the coming weeks,” said Chris Williamson – chief economist at S&P Global.

Meanwhile, production activities in the US improved, but showed signs of hoarding goods due to concerns about supply shortages and rising prices. Delivery times and output prices are both at their highest levels since the pandemic four years ago, when supply chains were also disrupted.

The US PMI index increased to 54 points in April – the highest in nearly 4 years. This level also exceeded analysts’ forecasts. The new orders tracking index also increased sharply to 54.8 points. PMI of the service sector recovered compared to last month, returning to above 50.

However, Williamson said this increase does not reflect a vibrant economy. “April PMI shows that the economy is struggling to maintain an annual growth rate above 1%, but the service sector is the main driving force,” he said.

Another notable point in S&P Global’s report is increased output at factories in Japan, India, England and France. However, the company believes that in some cases, this reflects businesses accelerating production because of concerns about more serious supply chain disruptions.

In Japan, factory output increased the most in 12 years, although input costs also increased the fastest since the beginning of 2023. If the “production acceleration” phenomenon continues, the situation will be similar to the beginning of last year, when businesses accelerated exports before the US raised import taxes. This also means that production activities may decline afterward.

S&P Global’s PMI report is consistent with the cautionary warnings in the company’s first-quarter earnings report. Many companies, from food company Danone (France) to elevator manufacturer Otis Worldwide, mentioned transportation disruptions due to the conflict.

In 166 corporate reports since the conflict began, 26 companies withdrew or lowered their forecasts for business results, 38 businesses signaled price increases and 32 warned of financial impacts from the conflict.

Rising fuel costs are driving up overall inflation. The consumer price index (CPI) in the US in March increased by 0.9% compared to the previous month. This is the highest speed in nearly 4 years. Inflation also increased in the UK and the euro zone. However, core inflation (excluding fuel prices) of countries has not increased sharply, at least currently.

However, not all sectors are going down. The wave of investment in artificial intelligence (AI) is still helping the technology industry benefit. Major fluctuations in the world market recently also brought benefits to financial trading companies.

South Korea recorded the fastest GDP growth in the first quarter in nearly 6 years, thanks to a sharp increase in chip exports. In the US, the technology industry is also forecast to lead in first-quarter profit growth. The London Stock Exchange (LSEG) expects full-year revenue to be high within the forecast range, after recording record first-quarter revenue thanks to a sharp increase in trading activity.

However, the global economic outlook still depends largely on the duration of the conflict and the level of transport congestion through the Strait of Hormuz. Last week, the International Monetary Fund (IMF) lowered its global growth forecast this year to 3.1%, and warned of the risk of recession if the disruption is prolonged.

Jamie Thompson, a macro expert at research firm Oxford Economics, said past energy shocks often left a lasting impact for years on inflation, investment and energy production. “25% of businesses participating in Oxford’s recent survey believe disruption will continue into next year,” he said.