Factory activity in Europe, Asia cools; demand lull a concern

Credit: Reuters/Stringer

An employee works at a machine manufacturing factory in Huaibei, Anhui province, September 1, 2014.

Despite euro zone manufacturers barely raising their prices, growth in the region slowed slightly more than initially thought, and activity in China's vast factory sector slackened on weak foreign and domestic demand, stoking speculation that further policy stimulus would be needed.

'A concerted slowdown in the China, euro zone and UK manufacturing PMIs as the second quarter gets under way raises alarm bells about global demand conditions,' said Lena Komileva, chief economist at G+ Economics in London.

'This raises serious questions about the ability of major economies such as the U.S. and the UK, to weather higher interest rates, or in the case of the euro zone to withstand deflationary pressures without further stimulus.'

Euro zone factories stumbled with the final August PMI at 50.7, the lowest in over a year, as new orders slowed amidst rising tensions over Ukraine that have triggered sanctions from the West and countermeasures from Russia.

Still, that was the 14th month the index has been above the 50 line that separates growth from contraction.

The factory PMI for Germany, Russia's biggest trade partner in the European Union, fell to an 11-month low while in the bloc's second-largest economy France it dropped further below the breakeven mark.

The drop in euro zone manufacturing activity came despite factories barely increasing prices and, with inflation dropping to a fresh five year low of 0.3 percent in August, that raises risks of the region slipping into deflation.

Both data come just days ahead of a European Central Bank meeting. Although fresh policy action is thought unlikely, the slowdown in growth coupled with rising risks of deflation will increase the pressure for more stimulus. [ECB/INT]

'It reinforces the case for the ECB to keep policy easy. The ECB will likely maintain a dovish tone at this meeting without any action but we expect some details on its plans to implement an asset purchase program in the coming months,' said Philip Shaw, economist at Investec.

In contrast, the Bank of England and U.S. Federal Reserve are widely expected to begin raising interest rates next year with Britain tipped by analysts as the first mover. [BOE/INT]

But slowing economic activity, smaller price rises and weak pay growth mean those plans are not cast in stone.

The latest CIPS/Markit data for Britain showed factory activity grew at its slowest pace in 14 months despite muted price pressures.

'The survey provided a worrying sign that the manufacturing sector's recovery is struggling to maintain its momentum,' wrote Paul Hollingsworth, UK economist at Capital Economics.

'In addition, the output balance, which has a fairly good relationship with the official measure of manufacturing output, fell.'

Britain's main manufacturing trade body on Monday cut its growth forecast for 2014 after its members reported a big drop in export orders.

A survey due on Tuesday is likely to show U.S. factory activity also cooled in August but much will also depend on jobs data due on Friday. U.S. employers are expected to have added 220,000 new jobs in August, 11,000 more than in July.

MIXED ASIAN BAG

China's official manufacturing PMI fell from a 27-month high to 51.1 in August, while the HSBC/Markit PMI eased to 50.2.

The fall in overall activity was also driven by job cuts for the 24th consecutive month and highlights the still patchy recovery, increasing speculation of further policy easing.

The People's Bank of China has so far refrained from cutting interest rates, preferring instead to ease liquidity for some banks to free funds for lending. Beijing in turn has tried to ease conditions in the property market.

But China's housing market, which accounts for 15 percent of output, is at the start of what many fear will be a punishing downturn. Future robust economic growth will depend on that downturn being contained.

There were some bright spots in Asia, however.

In India, factory growth eased a touch but chalked up its tenth month of expansion. Last week data showed economic growth quickened to an annual 5.7 percent in the second quarter.

Taiwan's manufacturers reported the strongest expansion in new orders in over three-and-a-half years, much of it for export, lifting the PMI to 56.1 in August.

But South Korea suffered as its exports to China fell in August for a fourth month running, the longest such losing streak in two years, and Indonesia's PMI survey showed activity contracted for the first time in a year.

(Additional reporting by Jonathan Cable in London; Koh Gui Qing in Beijing and Deepti Govind in Bangalore; Editing by Ross Finley and John Stonestreet)

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