Tags: China | Factories | Europe

China Factories Struggle as Europe Seen Contracting

Wednesday, 23 November 2011 10:44 AM

Global manufacturers floundered this month as new orders slumped, and with survey data also showing services business growth faltering, concerns are rising that the world is headed for another downturn.

China's once-booming factory sector shrank at its fastest pace in 32 months on signs of domestic weakness, according to similar survey data released earlier, reviving worries about a hard landing there.

Europe's data looked no better for European policymakers who are battling to control a paralysing debt crisis that has spread from periphery members to the core and is threatening the euro zone's survival.

The euro zone's private sector contracted for a third month, purchasing managers' indices showed on Wednesday, pointing to a fourth quarter economic contraction of 0.5-0.6 percent, according to survey compilers Markit.

"It's showing signs of a global downturn but I don't think we've got a global recession on our hands," said Jeavon Lolay, head of global research at Lloyds Banking Group.

"If it deteriorates from here then, yes, there is a chance that we get a significant downturn."

Forward-looking indicators in the surveys also painted a bleak outlook, with optimism crumbling, new orders falling, and virtually no jobs growth.

The data showed euro zone core members France and Germany also took big hits to their economies during the month.

The euro extended its slide against the dollar after poor demand at a German bond auction prompted concerns over the safe-haven appeal of German sovereign debt. The FTSEurofirst 300 index of top European shares deepened losses.



The euro zone's dominant service sector contracted less than expected this month, but its manufacturing sector, which fuelled a large part of the last recovery, shrank more than predicted as output fell to its lowest level since mid-2009.

Markit's flash euro zone composite PMI, often used as a barometer of growth, nudged up to 47.2 from October's 28-month low of 46.5, marking its third month below the 50 mark that divides growth from contraction.

The services business expectations index sank to its weakest since March 2009, when global stock markets hit their nadir not not long after the darkest point of the last recession.

Chris Williamson, chief economist at Markit said that meant that services growth will weaken further in coming months.

Meanwhile the euro zone manufacturing PMI fell to 46.4 in November from 47.1, its lowest reading since July 2009.

Official Eurostat data showed industrial new orders plunged in September by their biggest amount since December 2008 -- far more than economists had forecast.

The European Central Bank cut interest rates by 25 basis points to 1.25 percent earlier this month and new bank president Mario Draghi is expected to cut again in the coming months.

Draghi, who only took on the top job a few weeks ago, warned at the central bank's November meeting that the bloc could subside into a "mild recession" by the end of the year.

"ECB policy action is inevitable now at the next meeting," said Jeavon Lolay at Lloyds.

But it is increasingly clear that with interest rates already so low, European policymakers don't have a solution to avert another recession.

The Bank of England's Monetary Policy Committee voted unanimously this month to maintain its bond purchasing programme but said the chances of a worst-case outcome for the euro zone crisis had increased in the past month.

That left the door open to increase its quantitative easing programme beyond 275 billion pounds.





A steep fall in China's HSBC flash PMI to 48 in November from 51 largely reflected domestic weakness, as both output and new orders shrank even as export orders continued to grow.

The flash PMI, the earliest readout of China's industrial activity, was also the weakest since March 2009, underscoring expectations that Beijing will lean more on policies to support growth than fighting inflation.

Indeed, the PMI gauges of changes in input and output prices in China dropped around 10 points each to April 2009 lows.

"They are not going to want this to go too far," said Tim Condon, head of Asia research at ING. "I'm not sure if it (PMI) is a tipping point but I think it adds to the evidence."

The China industrial output sub-index tumbled to a 32-month low of 46.7, a steep drop from 51.4 in October. The new orders index suffered the biggest one-month drop in 1-1/2 years to sink well below the 50 mark that divides growth and contraction.

HSBC, which sponsors the China flash PMI, again took what has been a consistently upbeat view whenever the PMI data disappoint analysts and financial markets.

"There remains no need to panic," HSBC economist Qu Hongbin said. "Easing inflation provides room for more easing measures, which will keep China on track for a soft landing."

Qu said the PMI data suggested industrial output growth in China will moderate in coming months to an annual rate of 11-12 percent, a pace not seen since 2009 when China was pulling out of the global financial crisis.

Output has averaged close to 14 percent this year.

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Global manufacturers floundered this month as new orders slumped, and with survey data also showing services business growth faltering, concerns are rising that the world is headed for another downturn. China's once-booming factory sector shrank at its fastest pace in 32...
Wednesday, 23 November 2011 10:44 AM
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