Geopolitical shocks impact the global supply chain: U.S. manufacturing costs soar, Europe faces stagflation brink

Originally from: Xinhua Finance

Xinhua Finance Beijing, April 2 (Cui Kai) — U.S. manufacturing showed strong expansion momentum in March, but the supply-chain crisis and cost surge triggered by geopolitical conflicts are becoming the biggest “gray rhino” on the road to economic recovery.

According to data released by the Institute for Supply Management (ISM), the U.S. Manufacturing Purchasing Managers’ Index (PMI) rose from 52.4 in February to 52.7 in March, the highest level since August 2022, showing that the industry has maintained expansion for the 17th consecutive month. The production index rose to 55.1, indicating that output activity has accelerated significantly.

However, behind this impressive data, there is tremendous inflation pressure. The Prices Paid Index, which measures factory input costs, jumped sharply to 78.3, the highest level since June 2022. Data shows that over the past two months, this index has cumulatively increased by 19.3 percentage points, the largest double-month rise in nearly a decade.

“The root of this round of cost shock directly points to the rapid escalation of the Middle East geopolitical conflict,” the analysis noted. The broad rise in prices of raw materials such as steel, aluminum, copper, natural gas, and plastics, combined with tariff factors, has collectively driven up manufacturers’ operating costs.

The core trigger for the current situation of runaway manufacturing costs is the Middle East conflict choking global trade lifelines. As the situation in the Middle East escalates, shipping through the Strait of Hormuz has been severely disrupted, and was even put under a blockade at one point.

The disruption of this crucial route has produced a wide-ranging chain reaction. Not only has oil transportation been interrupted, but supplies of key industrial raw materials—such as aluminum, fertilizers, and “helium” essential for semiconductor production—have also been cut off. In the ISM survey, the supplier delivery index rose to 58.9. Readings above 50 indicate that delivery speed continues to slow, and the degree of delays has reached the worst level since May 2022.

“Supplier deliveries slowing down is not simply a reflection of strong demand; it more reflects the intense impact of geopolitical conflict on global supply chains,” the ISM report said. About 64% of the surveyed companies gave negative comments, and 40% explicitly cited that the situation in the Middle East has affected their operations by causing transportation delays and increasing costs.

Although the overall data are positive, there is clear divergence within U.S. manufacturing. In March, 13 manufacturing sub-industries recorded growth, including transportation equipment, computers and electronic products, machinery, and chemicals—however, industries such as plastic and rubber products, furniture, and food and beverages were in contraction.

External demand is also beginning to show signs of fatigue. The new export orders index fell to 49.9, returning to the contraction zone, indicating that trade frictions and global uncertainty are putting pressure on exports. Meanwhile, the employment index remained in the contraction zone at 48.7, showing that firms remain cautious about hiring. Since January 2025, manufacturing employment positions have decreased by 100,000.

Cost pressures are also troubling manufacturing in the Eurozone. Driven by rising oil and energy prices, input cost inflation in the region’s manufacturing soared to a 41-month high. Manufacturers then raised their selling prices at the fastest pace in more than three years, directly weakening the Eurozone’s industrial competitiveness. Joe Hayes, Chief Economist at S&P Global Market Intelligence, said that the Middle East war has left a clear mark on Eurozone manufacturing. With supply-chain tensions and high costs compounded by potential weakness in demand, if the conflict continues, the risk of stagflation for the industry will further intensify.

From the perspective of member countries across the Eurozone, divergence is significant. In Germany, the March manufacturing PMI final reading rose to 52.2, a 46-month high; in Italy, the PMI rose to 51.3, a 37-month high. Greece and Ireland saw strong PMI performances. France’s PMI final reading was only 50, stagnating. Spain’s PMI fell to 48.7, returning to the contraction zone. At the same time, business confidence in the Eurozone slid to a five-month low, and manufacturers have become more cautious about expectations for future growth.

Manufacturing in economies such as the United Kingdom and Australia has been directly hit by the conflict, showing a weak performance. The United Kingdom’s March manufacturing PMI final reading fell to 51, below the initial and prior readings. The output indicator dropped from 52.5 to 49.2, marking the first contraction since last September. The month-over-month increase in manufacturing input costs hit the biggest record since October 1992. This was mainly due to rising oil and gas prices and increasing transportation costs. Manufacturers have begun to pass cost pressure to downstream sectors, and the rate of increase in output prices is at the highest level in nearly a year.

Australia’s manufacturing also returned to the contraction zone. In March, S&P Global Australia Manufacturing PMI fell from 51 to 49.8, slipping again after four consecutive months of expansion. Respondents said that the Middle East conflict has led to shipping delays and raw-material shortages, and combined with sluggish domestic demand, output has declined for two consecutive months. The rate of increase in input costs reached the highest level in more than three and a half years, and business confidence fell to a 20-month low.

Overall, the spillover effects of the Middle East conflict have spread from the military arena to global manufacturing. The supply-chain disruption triggered by the Strait of Hormuz blockade, along with soaring energy and commodity prices, has become the core variable disrupting the global manufacturing recovery.

Although manufacturing in major economies such as the United States and the Eurozone still remains in expansion, problems such as high costs, weak demand, and lackluster employment have become prominent. The sustainability of industry recovery faces severe tests. Economists generally believe that if the Middle East conflict continues, the risk of stagflation in global manufacturing will further rise, and warming inflation expectations could also affect the direction of monetary policies of major central banks.

Editor: Ma Mengwei

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