Global Factories Hit by Soaring Costs as Iran War Disrupts Supply Chains
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The economic fallout from the Iran war took a toll on European factories last month, dampening demand for manufactured goods while driving up raw material costs at the fastest pace in four years. Meanwhile, surveys released on Monday showed that Asian factories experienced growth, largely due to stockpiling efforts.
The conflict between the U.S.-Israeli alliance and Iran, which began in late February, has disrupted global trade, shaken financial markets, and raised serious concerns over worldwide energy supplies—particularly through the Strait of Hormuz, a critical chokepoint for oil and gas shipments.
The survey results followed a joint warning from the heads of the International Energy Agency (IEA), the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO), who said the war was placing increasing strain on global energy supplies.
According to S&P Global, the Eurozone Manufacturing Purchasing Managers' Index (PMI) fell to 51.6 in May, down from April's near-four-year high of 52.2. However, the figure came in slightly above the preliminary estimate of 51.4. A reading above 50 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.
In Germany, Europe's largest economy, manufacturing ground to a halt, while French factories experienced their first contraction since November.
A majority of economists polled by Reuters in May expect the European Central Bank (ECB) to raise its deposit rate this month and at least once more before the end of the year, in an effort to prevent rising energy costs from feeding into core inflation. Official data due on Tuesday is expected to show that inflation climbed further above the ECB's 2% target last month.
In the United Kingdom, factories raised their prices at the fastest rate since June 2022 in response to a sharp increase in production costs.
Asian Buffers
In contrast to Europe, factory activity expanded across most Asian economies, supported by stockpiling and efforts to secure supplies amid the ongoing conflict.
China's private sector manufacturing gauge expanded for the sixth consecutive month, while South Korea's index reached its fastest pace in five years, underscoring a region-wide effort to build buffers against potential disruptions from the ongoing conflict.
The RatingDog China General Manufacturing PMI, compiled by S&P Global, eased to 51.8 in May from April's 52.2, though it still came in slightly above analysts' forecast of 51.6. This result contrasted with an official survey that showed factory activity in the world's second-largest economy stalled last month, as new orders contracted and input costs continued to rise.
Japan's factory activity also expanded, with the PMI registering 54.5 in May—a slowdown from April's more-than-four-year high of 55.1. However, Japanese firms reported the sharpest rise in input costs since September 2022, driven by higher raw material prices.
South Korea's PMI climbed to 54.8 in May, up from 53.6, marking its highest level since March 2021 and again highlighting firms' efforts to secure supply chains.
In Vietnam, the factory PMI rose to 52.8 from 50.5, while Taiwan's index increased to 56.1 from 55.3, according to survey data. The Philippines' PMI also jumped to 50.8 from 48.3, moving back into expansion territory. (Source: Reuters)
