Eyes on ECB as euro zone shows signs of slowdown

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br INDIA-ECONOMY-PMI_0602_11 (42333676)

Reuters

A worker grinds a metal shaft used in water pumps at a manufacturing unit on the outskirts of the western Indian city of Ahmedabad yesterday. Indian factory activity expanded at a slightly faster pace last month, a business survey showed. Photo: Reuters

Jonathan Cable and Aileen Wang London and Beijing

Signs of an economic revival in China have raised hopes that Beijing’s targeted measures to bolster growth are having an impact but a slowdown in the euro zone will increase expectations of policy easing there.

Chinese factory activity expanded at the fastest pace in five months last month but euro zone manufacturing growth slowed more than initially thought, fuelling expectations that the European Central Bank (ECB) will ease policy this week.

“The Chinese numbers were fractionally higher. We are beginning to make some progress but it is consistent with this story that the Chinese economy is not going to grow as fast as it has in the past,” Peter Dixon at Commerzbank said.

“The European numbers were in and around the ballpark. It’s not the kind of data the ECB is going to react to instantly but it is part of a bigger puzzle that says we need more growth in Europe.”

Markit’s final manufacturing purchasing managers’ index (PMI) for the euro zone slipped to a six-month low of 52.2 last month from April’s 53.4 as strong figures from Germany failed to offset a contraction in activity in France.

The final number was below the initial reading of 52.5 but held above the 50 mark that separates growth from contraction for the 11th consecutive month. A subindex measuring output sank to 54.3 from 56.5, weaker than the initial reading of 54.7.

“The slowdown in euro zone manufacturing activity growth in May reinforces the belief that the ECB will deliver a package of measures at its June 5 policy meeting,” Howard Archer at IHS Global Insight said.

To spur growth, boost lending and drive up inflation the ECB is widely expected to cut its deposit rate to below zero, reduce its main borrowing rate and launch a refinancing operation aimed at businesses when it meets on Thursday.

Inflation in the 18 euro nations is predicted to have held steady at 0.7 percent last month, well within the ECB’s “danger zone” of below 1 percent.

Yesterday afternoon the Federal Statistics Office reported that annual consumer inflation in Germany was just 0.9 percent last month, down from an annual rate of 1.1 percent in April.

Germany is Europe’s largest economy and again supported tepid overall growth. But in France, the bloc’s second-largest economy, the PMI sank back below the 50 mark after just two months of expansion.

In Britain, which does not use the euro, manufacturing activity kept expanding rapidly last month, suggesting the economic recovery has lost little of its shine this quarter.

The reassuring Chinese factory data and Friday’s record high for Wall Street lifted world stocks and commodities yesterday, although markets are waiting to see how far the ECB will go with policy easing plans.

China’s official PMI, which is geared towards bigger, state-owned firms, rose to 50.8 from April’s 50.4, the National Bureau of Statistics said on Sunday, beating market expectations of 50.6.

“Recent pro-growth measures, which were stepped up further last Friday, may have lent a helping hand here,” Nikolaus Keis at UniCredit said.

Beijing stepped up policy fine-tuning in recent weeks and has unveiled a slew of measures this year to help shore up the economy.

China’s cabinet announced new easing measures on Friday to help lower funding costs and reduce operating burdens for companies to give more support for the real economy, adding to moves that included hastening construction of railways and public housing.

In South Korea, Asia’s fourth-largest economy and a manufacturing and export powerhouses, the HSBC/ Markit manufacturing gauge slid below 50 while trade data showed exports fell.

In India, the manufacturing PMI edged up but came in slightly below the median forecast in a Reuters poll.

Indonesia’s PMI surged to a record high but hopes were tempered after its trade balance slipped back into deficit in April after two consecutive months of surpluses. – Reuters


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