Economies worldwide surrender to malaise

Bloomberg

Employees work on the manufacture of construction machinery in Sany Heavy Industry Co.'s assembly shop in Changsha, Hunan Province, China, on Thursday, July 12, 2012. Sany Heavy Industry, Chinas biggest maker of excavators, lowered annual unit-sales forecast as slowing economic growth and government's curbs on property market sap demand. Photographer: Nelson Ching/Bloomberg

Jonathan Cable and Lucy Hornby London and Beijing

The euro zone is on track for its second recession in three years, China’s once booming manufacturing sector is contracting at a faster pace than previously reported, and the US is widely seen as struggling to keep up its pace of growth.

Business surveys released yesterday painted a global picture of economic malaise from Beijing to Berlin.

The euro zone economy would shrink about 0.5 percent in the current quarter as the economic rot is even spreading through Germany, the region’s largest and strongest economy, Markit’s purchasing managers’ index (PMI) suggested.

It came on the heels of the HSBC Flash China manufacturing PMI falling to 47.8 points for August, its lowest level since November and well down from July’s final figure of 49.3.

Growth in the US manufacturing sector is also expected to have slowed in August.

“The indicators taken as a whole indicate a material slowdown in the pace of the world economy,” economist Philip Shaw at Investec said.

The euro zone composite PMI, which measures manufacturing and services together, was actually slightly better than a month earlier, nudging up to 46.6 and just pipping forecasts for it to hold steady at July’s 46.5. But it was still its seventh month in a row below 50, the dividing line between contraction and growth.

“August’s flash euro zone PMI does nothing to challenge the notion that the [euro zone] is now firmly in recession,” Jonathan Loynes at Capital Economics said.

More worryingly, the downturn in smaller euro zone economies is clearly taking root in the core. The flash composite PMI for Germany fell to a three-year low, a fourth consecutive month of contraction.

German economic growth slowed to 0.3 percent in the second quarter on a sharp drop in investment, adding to evidence that it can no longer be relied on to pull the euro zone out of a deep slump, data showed earlier yesterday.

“Another reminder that a chronic lack of economic growth in the euro zone will continue to impede efforts to bring the debt crisis to an end,” Loynes said.

The euro zone economy shrank by 0.2 percent in the three months to June, according to official data. Economists polled last week predicted a similar outcome for the current quarter, with no growth until the start of next year.

Falling demand from debt-ridden Europe, China’s single biggest export market, has put the Chinese economy under pressure, with the ripples now being felt across the world.

“It’s very hard to put a positive spin on anything within the (China) data. Bottom line – a very poor update,” said Robert Rennie, the chief currency strategist at Westpac Bank in Sydney.

Japan said on Wednesday that exports slumped the most in six months in July, as shipments to Europe and China tumbled. Exports from Taiwan fell for a fifth consecutive month in July and South Korea recorded its sharpest export fall in July in almost three years.

Six consecutive quarters of slowing Chinese growth have also taken a toll on commodities markets, with falling prices and an uncertain outlook prompting BHP Billiton to shelve a $20 billion (R165bn) expansion project in Australia.

“[Yesterday’s] PMI report is a clear reminder that the slowdown is not yet over and that the Chinese economy is still too shaky to recover without ongoing policy stimuli,” Nikolaus Keis at UniCredit said. “The pressure on the Chinese authorities to further step up their policy accommodation is therefore growing.”

China has been fine-tuning policies to keep growth on track without releasing curbs on the property sector.

In contrast, central banks in the developed world have slashed interest rates to near zero and injected trillions of dollars into the money supply in efforts to support growth.

The European Central Bank is expected to cut rates by 25 basis points to a new record low of 0.5 percent when it meets next week, but analysts say that will do little to stimulate lending.

The US Federal Reserve is likely to deliver another round of monetary stimulus “fairly soon” unless the economy improves considerably, reveal minutes from the US central bank’s latest meeting. – Reuters