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Published On: Mon, Sep 1st, 2014

Cooling manufacturing activity in the euro zone and Asia stirs speculations on further policy stimulus

Euro zone factory activity slowed down after the strong July, while China’s recovery was merely patchy, arousing concerns about global demand.

Euro zone factory activity slowed down after the strong July, while China’s recovery was merely patchy, arousing concerns about global demand.

 

European factory activity marked a sizeable slowdown, following the strong July. The reason was the dwindling of new orders as tensions mounted in Ukraine and the patchy recovery in China.

Euro zone manufacturers raised prices just a notch; nevertheless, the region growth slowed down a bit more than initially expected. China’s comprehensive factory sector became sluggish as both domestic and foreign demand diminished, fueling speculations on the need for further policy stimulus.

The second quarter decrease in the euro zone, China and the UK manufacturing PMIs made investors anxious about global demand and about major economies’ capability of standing higher interest rates. For the euro zone it is a matter of withstanding deflationary pressures without the aid of further stimulus.

The final euro zone PMI for August came out at 50.7, the lowest in over a year. European factories experienced slumping new orders owing to Ukraine events entailing harsh Western US and EU sanctions and retaliating Russian sanctions. And yet the figure was slightly above the 50 line, dividing growth from contraction, for a 14-th month in a row. The German factory PMI dropped to an 11-month low. The index for France, the second largest EU economy, dropped further below the breakeven mark.

The euro zone manufacturing drop in spite of just slightly raised prices, and August’s inflation slumping to a fresh five-year low of 0.3 percent amplified risks for the area sliding into deflation.

The data were released in the run-up to a European Central Bank meeting scheduled for this Thursday. There is no expectation of fresh policy actions, but the growth slowdown intertwined with mounting deflation risks will further pressure for more stimulus. The ECB is expected to adhere to easy policy, being dovish at the forthcoming meeting, but still without taking concrete action. Yet details are expected on the bank’s plans for an asset purchasing program in the next months.

The expectations for the US Federal Reserve and the Bank of England are on the opposite side. Both institutions are anticipated to raise interest rates next year, with analysts forecasting Britain will be the first mover. Yet the slowing economic activity, the negligible price hikes and weak wage growth indicate such plans might be reconsidered.

According to CIPS/Markit data, Britain’s factory activity ticked up at the slowest pace in 14 months pressured by subdued prices. There is evidence that the manufacturing sector is finding it hard to keep its momentum. Yet another reason for concern comes from the decline in output balance, which is strongly related to manufacturing output. In Britain, the major manufacturing trade body reduced its 2014 growth forecast on Monday, as it reported a massive decline in export orders.

A survey of US factory activity to be released on Tuesday is expected to indicate cooling in August. Further clues about the economy losing steam are awaited from the Labor Department jobs report on Friday. The August addition of new jobs amounts to 220,000 – 11,000 more compared to July.

The Chinese official manufacturing PMI for August dropped to 51.1, from a 27-month high. The overall activity slump was also sped up by job cuts, for the 24th month in a row, indicating the recovery continues to be patchy and giving rise to speculation on further policy easing.

The People’s Bank of China has not resorted to interest rate cuts but rather to easing liquidity to banks in order for lending to be stimulated. Beijing has attempted to ease property market conditions. China’s housing market, yielding 15 percent of output, is deemed on the edge of a downturn which should be contained to enable robust economic growth.

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