A contraction in manufacturing business spread further around the world in August as the euro zone's troubles inflicted more damage on the global economy, business surveys showed on Monday. The three-year-old sovereign debt crisis has probably thrown the 17-nation euro zone back into recession in the current quarter.
---- Eurozone factories contract faster than thought in Aug
---- Chinese PMI suggests growth slowdown persists into third quarter
---- Prompts calls for more central bank policy easing
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 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," said Peter Dixon, an economist at Commerzbank. "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 Eurozone Purchasing Managers' Index (PMI) for manufacturing fell from an earlier flash reading of 45.3 to 45.1, above July's three-year low of 44.0. But that was its 13th month below the 50 mark separating growth from contraction. Britain bucked the trend by posting a surprise rise in its PMI - although it still showed contraction - and similar data expected from the US Institute for Supply Management on Tuesday is 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, while a similar survey from Markit, sponsored by HSBC, showed activity shrinking at its fastest pace since March 2009. HSBC PMIs covering Asia's other major exporters told a similar tale. South Korea's reading was below 50 for the third month and Taiwan's PMI fell to its lowest level since November.
The reports showed new orders under pressure as fears grow that the euro zone is sliding into recession and the United States 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. 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 world's second-largest economy is weakening. Chief among manufacturers' concerns are 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 raises doubts as to whether Beijing 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 stimuli," said Wei Yao, economist at Societe Generale. "Although we think it is a good thing that the pain threshold of Beijing is quite high, 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 again in the current quarter, with no growth expected until next year. The European Central Bank is now widely 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. As such, a rate cut to 0.5 percent will be quite easy to justify," said Annalisa Piazza at Newedge Strategy. 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 straight month.
Factories in Germany, Europe's largest economy, and France - the second biggest - reported activity falling for the sixth consecutive month although the rate of decline eased. In Italy, the main index has now been below the break-even point for over a year and was weaker than economists had predicted. In Spain, it has been below 50 since May 2011.
These two countries are deep into austerity programmes which are aimed at bringing their debt under control but 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 to bring down borrowing costs, but this policy is meeting strong resistance from German central bankers.
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