A textile mill in Huaibei, eastern China. Chinese factories have been hit by slowing orders, especially from Europe. Chinas official manufacturing purchasing managers index fell to 49.2 in August, showing the first contraction in activity in nine months. Photo: Reuters

Jonathan Cable and Lucy Hornby London and Beijing

A contraction in manufacturing activity spread further around the world last month as the euro zone’s troubles inflicted more damage on the global economy, business surveys showed yesterday.

The three-year-old sovereign debt crisis has probably thrown the 17-nation euro zone back into recession in the current quarter. With no firm signs of any resolution, households and companies are wary of spending and demand for goods is drying up.

Worryingly for European Central Bank (ECB) policymakers meeting this week, the downturn that began in smaller euro zone economies is now clearly sweeping through Germany and France. That, in turn, is damaging many of Asia’s export-reliant economies.

“The general picture is one in which we are losing momentum,” Peter Dixon, an economist at Commerzbank, said. “Growth is going to struggle, not just in the euro zone but everywhere, over the next few months until authorities find a way to inject some positive sentiment.“

Markit’s final euro zone purchasing managers’ index (PMI) for manufacturing fell from an earlier flash reading of 45.3 points to 45.1. It was above July’s three-year low of 44, but that was its 13th month below the 50 mark separating growth from contraction.

Britain posted a surprise rise in its updated PMI, although it still showed contraction, and similar figures expected from the US Institute for Supply Management today are forecast to show a reading of 50.

In Sweden, which has consistently outperformed the rest of Europe, the PMI tumbled unexpectedly to a three-year low as exporters’ long-standing resilience began to erode.

China’s official PMI fell below 50 for the first time since November last year. A similar survey from Markit, sponsored by HSBC, showed Chinese activity shrinking at its fastest pace since March 2009.

HSBC’s PMIs covering Asia’s other major exporters told a similar tale. South Korea’s reading was below 50 for a third month and Taiwan’s PMI fell to an eight-month low.

The reports showed new orders under pressure as fears grow that the euro zone is sliding into recession and the US struggles to build up any economic steam.

Even in India, where the manufacturing sector has expanded without a break for more than three years, new export orders fell in August at their steepest pace since October last year. Indonesia’s factory activity also expanded in August, but new export orders fell for the fifth month in a row.

China’s PMIs reinforced expectations that the pace of growth in the second-largest economy is weakening. Chief among manufacturers’ concerns is the softness in new orders as demand falters, particularly from the euro zone.

Beijing is taking what it calls a “prudent” policy stance in supporting the economy for fear of re-igniting property and inflation risks.

China cut interest rates in June and July and has been injecting cash into money markets to ease credit conditions. The latest data raise doubts as to whether it has done enough to stop the slowdown from extending to a seventh quarter.

“The authorities seem to be running a risky policy experiment to see how well the economy can hold up without any big dose of stimulus,” Wei Yao, an economist at Société Générale, said. “This approach is prone to large downside risks in the short term.”

Having contracted 0.2 percent in the three months to June, the euro zone economy is likely to do the same in the current quarter, with no growth expected until next year.

The ECB is expected to cut interest rates to a new record low of 0.5 percent – either on Thursday or next month.

“The picture for the euro zone economy remains extremely sluggish [so] a rate cut to 0.5 percent will be quite easy to justify,” Annalisa Piazza at Newedge Strategy said.

Inflation jumped more than expected in August, data showed on Friday, a factor that may discourage the ECB from acting this week, but the PMI survey showed factories had cut the prices of their products for the third consecutive month.

Italy and Spain are deep into austerity programmes that appear to be pinning their economies in recession. They are looking to the ECB to help them escape this vicious circle by buying debt issued by their governments, but this idea is meeting resistance from German central bankers. – Reuters