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Tags: Factory Growth | Europe | Asia | Stimulus

Factory Growth Ebbs in Europe, Asia, Making Case for More Stimulus

Monday, 03 November 2014 07:02 AM EST

Factories across Asia and the eurozone reported a general loss of momentum last month that speaks volumes about the need for more policy stimulus on top of Japan's latest efforts to ignite growth.

A second month of price-cutting in the eurozone, alongside only tepid expansion in Germany — the bloc's growth engine — and contractions in France and Italy, will be disconcerting for the European Central Bank as it faces a real risk of deflation.

Meanwhile, regional manufacturing surveys from Asia were littered with unwelcome landmarks, including a five-month low for activity in China, a four-month trough for South Korea and a 14-month low for Indonesia.

Japan's bold move in expanding its already massive asset buying program raised expectations the ECB will eventually have to bite the bullet on quantitative easing, but the move faces opposition from Germany.

"You are going to need some out-turns that are weaker than these to convince them they need to do QE but it is a trickle effect and every month you get the absence of a pick-up you get a month closer to QE," said Victoria Clarke at Investec.

"China is on a bit of a softer growth path than it has been, but there is nothing there that suggest it is heading further south. The authorities are going to continue to provide a floor to growth that limits any downside and that is being evidenced."

Beijing has already cut taxes, quickened some investment projects, offered short-term loans to banks, instructed local governments to spend their budgets and reduced the amount of deposits that some banks hold as reserves to spur lending.

Readings on Japanese activity were delayed by a holiday but will likely be overshadowed by the Bank of Japan's decision on Friday that took financial markets by surprise.

The BOJ's move stands in marked contrast with the Federal Reserve, which on Wednesday ended its own quantitative easing, judging that the U.S. economy had recovered enough to dispense with the emergency flood of cash into its financial system.

Some form of quantitative easing — buying asset-backed securities, corporate bonds or sovereign debt — is one of the last policy options the ECB has left to fight deflation risks and rekindle growth in the monetary union.

Eurozone inflation was just 0.4 percent in October, well within what the ECB terms a "danger zone" and the surveys showed that further discounts at the factory gate failed to drive up new orders.

Markit's final October manufacturing Purchasing Managers' Index was 50.6, beating September's 50.3 but shy of an earlier flash estimate of 50.7. October marked the 16th month the index has been above the 50 line that divides growth from contraction.

An index measuring output, which feeds into a composite PMI due on Wednesday that is seen as a good indicator of economic growth, rose to 51.5 from September's 51.0, although that too was lower than the flash reading, which came in at 51.9.

November will probably not be much better as orders fell, backlogs were run down and stocks of finished goods built up.

"Perhaps most worrying is the trend in new orders, a key bellwether of future output growth," said Rob Dobson, senior economist at Markit. "It is hard to see any significant near-term boost to performance."

Germany's manufacturing industry returned to modest growth last month but new business fell slightly for a second month as Russian sanctions and a general economic slowdown weighed on demand.

Adding to the gloom, the surveys showed French factory activity contracted faster than in September and Italian manufacturing slowed at the sharpest rate in 17 months.

The relative outperformance of the U.S. economy should be evident in the ISM survey out later on Monday which is expected to hold at a healthy 56.2 while October's payrolls report on Friday is forecast to show a solid increase. ECONUS

British factories also reported a decent month of October. Activity expanded at the fastest rate in three months but weak demand from the eurozone, its main trading partner, sent export orders tumbling at the fastest pace since January 2013.

After the releases the dollar powered to a seven-year peak against the yen and a two-year high against the euro although the data showing China's economy is losing momentum tempered investors' mood and weighed on global stocks.


HSBC's version of the China PMI, compiled by Markit, was a whisker firmer at 50.4 in October, from September's 50.2, but showed growth slowing in output and new orders, while companies trimmed staff levels for the 12th straight month.

"Sentiment has slightly deteriorated on the back of the Chinese PMI. Overall, the data is disappointing," Credit Agricole economists said in a note to clients.

China's official PMI for services fell to 53.8 in October, down from September's 54.0 and the weakest reading since January, the National Bureau of Statistics said.

The comparable measure for manufacturing eased to 50.8 in October, from September's 51.1, confounding analysts' expectations for an improvement to 51.2.

Foreign demand was partly to blame and the same trend was evident in South Korea, where new export orders were down for a third straight month and at the lowest in 14 months.

Even Taiwan's privileged position as a major supplier of Apple (AAPL.O) products could not prevent some slowing as its PMI slipped to the lowest in 13 months at 52.0.

A rare bright spot was India, where the HSBC PMI rose to 51.6 in October, from 51.0 in September, extending its run above 50 to a full year.

© 2023 Thomson/Reuters. All rights reserved.

Factories across Asia and the eurozone reported a general loss of momentum last month that speaks volumes about the need for more policy stimulus on top of Japan's latest efforts to ignite growth.
Factory Growth, Europe, Asia, Stimulus
Monday, 03 November 2014 07:02 AM
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