Global factories weaken in July as Iran war disrupts trade

Manufacturing activity across major economies weakened in July as the five-month-old war in the Middle East continued to disrupt supply chains and inflate input costs, while hopes of a diplomatic breakthrough between the United States and Iran sent oil prices and euro zone bond yields lower on Monday.

Factories Under Pressure

Surveys released Monday showed that the conflict, which has nearly halted shipping through the Strait of Hormuz since U.S. and Israeli strikes on Iran began on February 28, delivered weaker demand and elevated energy costs to factories worldwide. China's manufacturing sector saw new order growth slow to its weakest pace since January, while French factory activity slipped back into contraction and Italy's growth decelerated, according to Reuters.whtc+2

The eurozone manufacturing PMI rose to 51.9 in July from 51.4 in June — its highest reading since April — but the gain was largely driven by firms clearing order backlogs rather than fresh demand. "It's a mixed bag, but with the main conclusion the euro zone economy is more resilient than feared," said Carsten Brzeski at ING, adding that growth would remain weak "unless obviously something really bad happens in the Middle East".whtc

India's manufacturing sector expanded at its slowest pace in nearly five years, while Japan bucked the trend with its fastest factory output growth in more than 12 years, buoyed by AI-related demand. In Britain, manufacturing expanded for a ninth straight month but at its slowest pace in four months.whtc

Oil Retreat Lifts Bond Markets

Euro zone government bond yields fell on Monday after oil prices retreated sharply on expectations of diplomatic progress. Brent crude dropped about 5% after President Donald Trump said talks with Iran were expected to begin later Monday, raising hopes of an agreement to reopen the Strait of Hormuz.economictimes+2

Germany's benchmark 10-year bond yield fell 5 basis points to 3.158%, while money markets pared expectations for additional European Central Bank rate increases. However, Iran's foreign ministry said no negotiations were taking place with the United States, though discussions with Oman were continuing.youtube+1

Uncertain Path Forward

S&P Global ↘ 0.62% noted it was difficult to imagine Germany's manufacturing strength being sustained without a resolution to the conflict, given oil price volatility and broader uncertainty. Euro zone inflation rose to 2.9% in July from 2.8% a month earlier, reinforcing the case for further ECB tightening that could add constraints on demand. Analysts at ING cautioned that sustained declines in oil prices would depend on concrete progress toward reopening the strait.economictimes+1