Pat Dollard

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Workers attend a demonstration to protest the government austerity cuts in Madrid

Financial Times:

Figures showed manufacturing output slowing across large parts of the world, posing further challenges to leading economies as they attempt to shore up shaky fiscal positions without falling back into recession.

In Asia – the world’s production powerhouse whose economies are still largely dependent on export demand – manufacturing activity indices for China, South Korea, Taiwan, India and Australia all showed weaker activity for June.

The overall level of factory activity still suggested production was expanding but at a more moderate rate than in recent months.

“China’s recovery remains solid but is clearly moderating from the very fast pace set at the start of the year,” said Brian Jackson, strategist at RBC Capital Markets in Hong Kong. But he added that concerns over weaker growth might cause China to restrict appreciation in the renminbi, which has been allowed some flexibility in the past two weeks. “A slowdown in activity in the months ahead may prompt some in Beijing to argue for a halt,” he said.

Last weekend’s G20 meeting in Toronto was marked by concern in some quarters, notably the US, that overly rapid fiscal tightening would deprive the global economy of much-needed domestic demand. Some economists are concerned that with monetary policy in the US and western Europe reaching the limits of what it can do, the weakness of demand risks letting the world economy slide back into recession.

Purchasing managers’ indices

Although Thursday’s data were well short of suggesting that, they did underline that many parts of the world economy were struggling for momentum.

Figures for the US also suggested the economy was losing impetus in spite of being well short of its productive capacity and receiving unprecedented support from monetary and fiscal policy. The Institute for Supply Management’s manufacturing index fell from 59.7 in May to 56.2 in June, a much larger drop than most economists had predicted. Although any reading above 50 indicates an expansion in manufacturing activity, this is now the second consecutive monthly drop in the index.

Unemployment in the US appears stuck at just below 10 per cent, and hopes that it might start falling received a setback yesterday as new claims for unemployment benefits unexpectedly rose. David Semmens, US economist at Standard Chartered Bank, said the jobless claims figures were “a timely reminder that firings in the US remain elevated and appetite from employers for hirings remains anemic”.

In the eurozone, an update to the manufacturers’ purchasing managers’ index showed its ninth month of expansion, but at a moderate rate that is not using up the spare productive capacity. Germany, whose highly competitive export manufacturers have benefited from slides in the euro in recent months, led the other countries in the rate of growth.

“The second quarter most likely represents a peaking in the rate of expansion of manufacturing output, as growth slows in coming months,” said Chris Williamson, chief economist at Markit, who produces the index.

He estimated that eurozone manufacturing has only recovered about 40 per cent of the output lost during the recession.

Nick Beecroft, FX Consultant at Saxo Bank, said: “This looks like the day that fears of a double-dip recession in the US, with all its attendant unpleasant consequences for the US budget deficit, finally trumped eurozone bank and debt concerns.”

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