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Global manufacturers strain to keep up with faster economy

UPDATED: Tue., Jan. 2, 2018, 7:17 p.m.

An employee fits a component to a Lexion 660 combine harvester on the production line at the Claas factory in Harsewinkel, Germany, on Aug. 28, 2017. (Krisztian Bocsi / Bloomberg)
An employee fits a component to a Lexion 660 combine harvester on the production line at the Claas factory in Harsewinkel, Germany, on Aug. 28, 2017. (Krisztian Bocsi / Bloomberg)

Factories across the globe warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices as the world economy looks set to enjoy its strongest year since 2011.

A slew of Purchasing Managers Indexes published on Tuesday from China, Germany, France, Italy and the U.K. all pointed to deeper supply constraints. The U.S. reading from IHS Markit rose for the third month in the past four, reaching the highest level since March 2015 amid “increased capacity pressures.”

Such strains on potential output may mean companies have to hire or invest more to avoid overheating, yet it could also force them to push up prices, propelling inflation enough to squeeze the expansion. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among the banks predicting worldwide growth will be around 4 percent this year, which would be the fastest since a post-recession rebound seven years ago.

“A key development to watch out for in 2018 is the potential advent of accelerating inflation,” said Larry Hatheway, chief economist at GAM. “It matters most because it is almost entirely unanticipated by markets, yet seems likely from the perspective of macroeconomic conditions.”

Government bonds fell around the world as traders moved to price in the prospect of quickening inflation. The yield on 10-year Treasury notes increased four basis points to 2.45 percent while the 10-year break-even rate, a gauge of the outlook for consumer prices over the coming decade, approached 2 percentage points for the first time since March.

In the U.S., the IHS Markit PMI rose to 55.1 from 53.9 in November, while the euro-area index was at a record 60.6.

The report said “robust intakes of new business tested capacity” in the euro area and there was a jump in backlogs of work as factories found it hard to keep up. In Germany, the region’s largest economy, this “poses a risk to the sector’s ability to kick on.”

The monthly report showed both new orders and output were the best in 17 years as exports gained. Germany’s gauge rose to a record and France improved. Canada reached a three-month high of 54.7 on stronger new orders. Global growth also got a boost from a solid reading in China’s manufacturing sector.

The JPMorgan and Markit Economics purchasing managers’ index for global manufacturing also increased to 54.5 in December, the highest since early 2011.

With industry at its limits, there are implications for inflation in the euro region, which remains below the European Central Bank’s target of just under 2 percent. Bundesbank President Jens Weidmann, who wants to set an end-date for monetary stimulus, recently cited regional bottlenecks as setting the stage for stronger wage growth.

“The missing element has been sustained higher inflation,” said Chris Williamson, chief business economist at Markit. “But the near-record incidences of supply-chain delays seen toward the end of 2017 indicate that pricing power is shifting from the buyer to the seller, suggesting upward price pressures are gradually returning.”

In the U.S., the Federal Reserve raised interest rates three times last year and, according to officials’ median forecast, has penciled in another three this year on the expectation that inflation will move back toward its 2 percent target.

“The combination of strengthening growth, a solid labor market and rising prices will add to expectations that the Fed will remain on track for another rate hike in the near future, with March looking a likely possibility,” Williamson said.

Input costs remain elevated across a number of economies, partly reflecting higher raw material prices.

In China, the Caixin factory PMI rose to 51.5 in December from 50.8 in November, marking the best reading in four months. The report noted faster growth of output, total new work and export sales, as well as an increase in backlogs of work. An official PMI weakened slightly, though remained above the key 50 level that signifies expansion.

China’s overall economic growth may slow in 2018 after accelerating last year, though the government has signaled it will accept slightly weaker expansion as it deals with what it says are “critical battles” of financial stability, poverty and pollution.

Car manufacturers are among those who have ramped up supply or felt the pressure of demand. Volkswagen AG’s main passenger-car brand said last Friday that production reached a record high last year with global output of more than 6 million vehicles, while Philippe Buros, Renault SA head of sales for France, told BFM Business radio Tuesday that French orders are up too.

“The French market has grown 5 percent on average over five years,” he said. ”It’s quite rare, so everyone’s struggling a bit to keep up“ in terms of production.

In China, state-owned Kweichow Moutai Co., the world’s most valuable spirits maker, is raising the price for its signature drink for the first time in five years and implementing an average 18 percent increase across its product line.

There were signs of weakness elsewhere in Asia, with factory indexes in Indonesia, Malaysia and South Korea dipping below 50 during December.

Still, the global economy is forecast to expand 3.7 percent this year, slightly faster than the 3.6 percent pace estimated for 2017, according to the International Monetary Fund’s most recent projections. The euro area will cool slightly from 2.3 percent this year, but still record growth above 2 percent, according to a Bloomberg survey of economists last month.

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