LDN - Business

Manufacturing vigor remains, strong currencies hinder exports

[March 01, 2018] By Jonathan Cable and Marius Zaharia

LONDON/HONG KONG (Reuters) - Manufacturing data painted a mixed picture of economic activity across the globe, with stronger currencies hurting exporters, but the growth momentum demonstrated at the start of the year appears to have only dwindled slightly.

The euro zone's boom has slowed a little further and Britain's factory activity slipped to its lowest in eight months, yet China surprisingly showed resilience amid fears tighter regulations may slow growth.

"Things came in a bit better than we expected. We are seeing pretty strong global growth and demand," said Jacqui Douglas, chief European macro strategist at TD Securities.

Factories across the euro zone are still enjoying their best growth spell in almost two decades which, alongside price pressures at a near seven-year high, will be welcomed by policymakers at the European Central Bank as they move closer to unwinding their ultra-easy monetary policy.

IHS Markit's final manufacturing Purchasing Managers' Index (PMI)for the euro zone fell to 58.6 in February from 59.6, just pipping an earlier flash estimate of 58.5 and comfortably above the 50 mark that separates growth from contraction.

That robust growth came even though a sub-index measuring output prices rose to 58.4 from 58.0, its highest reading since April 2011.

Despite a marked upturn in orders, Britain's factory PMI inched down to 55.2 in February, its second-lowest reading since June 2016's Brexit vote though a shade above the average forecast of 55.0 in a Reuters poll. [GB/PMIM]

Taken at face value, the figures suggest British factory output growth so far this year has slowed to a three-monthly rate of 0.4 percent compared with a robust 1.3 percent in the last three months of 2017, IHS Markit said.

"Growth in the manufacturing sector is moderating, now that the recovery in the euro zone has started to lose a little pace and more than 18 months have elapsed since sterling's huge depreciation," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Surveys from the United States later on Thursday are expected to confirm the strong momentum in global trade.

Federal Reserve chief Jerome Powell, in his first public appearance since talking the helm at the U.S. central bank, said this week he aimed to prevent the economy from overheating, cementing market expectations for three or four interest rate increases this year.

Other central banks such as the Bank of England and Bank of Canada have already raised interest rates and the ECB is widely expected to shut down its money printing presses by the end of 2018.

However, chances for rate hikes in Asia are far lower.

Bank of Japan board member Goushi Kataoka warned on Thursday against a premature exit from the BOJ's ultra-loose monetary policy and called for a ramping up of the bank's massive stimulus program.

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Labourers work at a garment factory in Bac Giang province, near Hanoi October 21, 2015. REUTERS/Kham/File Photo

Also, the full impact of China's crackdown on risky financing probably has yet to be seen.

A private survey showed factory growth at a six-month high, but the findings were largely at odds with downbeat official activity readings on Wednesday, which raised concerns that tighter regulations may lead to a sharper slowdown in the world's second biggest economy.

State-owned firms service China's domestic demand more and their weaker showing may point to weakness stemming from property-cooling measures, higher interest rates and tougher rules against risky financing, factors expected to weigh throughout the year.

Government measures to reduce pollution over the winter have also led to cuts in production, economists said, while the Lunar New Year holidays disrupted activity, suggesting the slowdown in some of the economies could be temporary.

"These numbers imply that the low reading is likely driven by holiday effects, rather than by any underlying slowdown in coming manufacturing activity," said Iris Pang, Greater China economist at ING.

EXPORT HITS

Manufacturing was a relative bright spot for Britain's economy late last year but growth in overseas orders slowed to its weakest in four months in February.

Japanese manufacturing expanded at a slightly slower pace in February as a stronger yen weighed on new export orders and Taiwan's factory growth was the slowest in four months, although both economies still posted relatively solid numbers.

South Korea's export growth slowed in February to its weakest in more than a year.

The Japanese yen <JPY=> is currently trading around its strongest in more than a year, the Korean won <KRW=> in more than three years and the Taiwanese dollar <TWD=> in more than five.

"For Asia, the strength of the currencies will have some impact but generally how growth in the G3 economies fares is more important," said Khoon Goh, head of Asia research at ANZ.

"We should continue to see a strong momentum in exports going into the second half, when base effects come into play," Goh said, cautioning against reading to much into the holiday-distorted numbers.

(Editing by Catherine Evans)

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