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Tags: factory | growth | global economy | Central Bank Stimulus

Sluggish Global Factory Growth Puts Central Bank Stimulus in Spotlight

Monday, 01 June 2015 07:55 AM EDT

Manufacturing activity showed scant sign of picking up across Europe and Asia in May as demand stayed stubbornly weak, highlighting the need for central banks to continue supporting growth.

The gloomy business surveys come a little less than three months after the European Central Bank embarked on a 1 trillion-euro stimulus program and will likely fuel expectations its counterpart in Beijing will have to roll out more aggressive policy measures.

Euro zone factory growth was weaker than previously thought last month while Chinese factory activity barely accelerated and South Korean exports sank.

"Across the euro zone as a whole it is plodding along. We can probably do with a little bit more strength out of Germany and France," said Peter Dixon at Commerzbank.

"We are going to have to live with rather slower growth in China. We have seen some modest monetary easing and I expect that will continue."

Markit's final May manufacturing Purchasing Managers' Index (PMI) for the euro zone was 52.2, below a preliminary flash reading of 52.3 but just ahead of April's 52.0. It was the 23rd month the reading has been above the 50 mark that separates growth from contraction.

Worryingly for the ECB, the region's top two economies struggled. German factory growth slowed to a three-month low and French manufacturing activity, though improving, still contracted.

But Spanish manufacturing grew at its fastest rate in over eight years and Italian factory output hit a four-year high.

The Markit/CIPS manufacturing PMI for Britain, outside the common currency area, rose to 52.0 from a downwardly revised 51.8 in April, weaker than forecast.

The focus now shifts to the United States, where hopes are pinned on stronger factory activity to offset the global downdraft from China and Europe.

U.S. monetary policy is widely predicted to be tightened later this year, just as expectations increase for more easing from other central banks.


China's official manufacturing PMI edged up in May but a private survey focusing on small and mid-sized firms showed their activity had contracted for a third straight month.

Both indexes are hovering around 50, pointing to very subdued activity at best. And both showed a further contraction in export orders was prompting factories to shed workers.

A separate survey showed growth in China's services industry, which had been the lone bright spot in the economy, cooled.

"We believe risks to the outlook remain to the downside," analysts at Barclays wrote in a note.

China's central bank has already cut interest rates three times in six months and is widely expected to ease policy further in coming months.

"The economy sees little sign of a pick-up," HSBC economists said. "We forecast more aggressive policy easing, including a 50-basis-point reserve ratio cut in the coming weeks."

The sluggish performance in China and uneven demand globally has dragged on other trade-reliant Asian economies.

South Korea's exports posted their worst annual fall in nearly six years, and a PMI survey showed manufacturing activity shrank for a third straight month.

"The weak export figures and the persisting weakness in other recent indicators support our view that the Bank of Korea will have to cut interest rates soon," said Park Sang-hyun, chief economist at HI Investment & Securities.

The picture in neighboring Japan appeared to be slightly better, with the Markit/JMMA final PMI reading at 50.9. But data on Friday showed Japanese household spending unexpectedly slumped in April and consumer inflation was roughly flat.

The patchy performance has cast doubts on the central bank's forecast for a slow and steady economic recovery and instead reinforced expectations it will have to pump in more stimulus.

India's PMI was the most upbeat result in the region and the survey came after figures on Friday showed its economy grew 7.3 percent in the fiscal year 2014/15.

But many economists say changes made earlier this year to the way government statisticians calculate GDP may have distorted the macroeconomic view.

That skepticism, and benign inflation, have kept alive expectations for another quarter point rate cut on June 2.

© 2023 Thomson/Reuters. All rights reserved.

Manufacturing activity showed scant sign of picking up across Europe and Asia in May as demand stayed stubbornly weak, highlighting the need for central banks to continue supporting growth.
factory, growth, global economy, Central Bank Stimulus
Monday, 01 June 2015 07:55 AM
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