Trade frictions disrupt global factory growth
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[July 02, 2018]
By Rahul Karunakar and Marius Zaharia
BENGALURU/HONG KONG (Reuters) -
Manufacturing activity took a hit in June across Europe and Asia, with
exporters losing momentum even before promised trade tariffs kick in,
underscoring worries the U.S. administration's protectionist policies
could derail global growth.
U.S. President Donald Trump has threatened tariffs on European cars on
top of duties he imposed on steel imports from the European Union. There
are also fears that a trade standoff between China and the United States
could harm manufacturers who rely on the world's two largest economies
for growth.
Stocks, the euro and oil prices fell as the data were the latest to
suggest world growth may have peaked. The recent economic strain is
likely to intensify as the effects of the heated China-U.S trade spat
ripple through global supply chains.
Weak export sales and stumbling new orders knocked euro zone factory
growth in June. IHS Markit's May final manufacturing Purchasing
Managers' Index for the bloc slipped for a sixth month, falling to an
18-month low of 54.9. [EUR/PMIM]
German factory growth slipped to an 18-month low and French
manufacturing activity slowed more than previously thought in June to
its weakest pace in nearly 1-1/2 years.
While British factories kept up a steady pace of growth, fears of a
full-blown global trade war and worries about stalled negotiations with
Brussels on leaving the EU knocked a gauge of confidence about the
outlook down to a seven-month low. [GB/PMIM]
"Today's numbers continue to corroborate that manufacturing settled into
a lower gear in the first half of the year," said Neal Kilbane, senior
economist at Oxford Economics.
"The very real threat of the current trade dispute with the U.S.
escalating further means that Europe's manufacturers are likely to have
to negotiate stormy waters for the rest of year."
The slowdown was broad-based across not just Europe but most of Asia as
well.
Shipments from China and Japan, major manufacturing hubs, contracted in
June, while businesses across Asia also took on higher input costs as
the price of oil and other commodities rose, according to monthly
manufacturing surveys.
"We expect the net contribution of trade to growth to become negative in
the second half of the year, if it hasn't already for some countries,"
ANZ Asia economist Eugenia Victorino said.
"The story for 2018 then becomes domestic demand, but it is not a
homogenous story ... and we don't expect a homogenous reaction from
Asian central banks."
However, with the U.S. Federal Reserve increasingly hawkish on rates,
hardly any Asian central bank has room to support consumption as they
need to keep their own rates relatively high to prevent destabilizing
capital outflows.
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Aluminium heater tubes are seen inside a factory in Dongguan, China
April 10, 2018. Picture taken April 10, 2018. REUTERS/Bobby Yip/File
Photo
CHINA PRESSURED
Apart from China potentially cutting reserve requirements further this year, no
other central bank is seen easing monetary policy, and the countries running
current account deficits may have to hike rates further.
China's Caixin/Markit Manufacturing Purchasing Managers' index (PMI) declined to
51.0 in June from May's 51.1, with a sub-index showing new export orders
contracting for the third straight month and the most in two years.
An official PMI survey on Saturday also fueled concerns about the strength of
the world's second-largest economy, where recent data including credit growth,
investment and retail sales have disappointed.
The economy is feeling the pinch of an internal crackdown on debt and risky
financing as well as external pressure from Trump's 'America First'
protectionist policies.
The U.S. has threatened to impose duties on up to $450 billion of Chinese
imports, with the first $34 billion portion set to go into effect on July 6.
Beijing plans to retaliate.
This has caused anxiety in financial markets, leading to the worst performance
on record for the yuan and the deepest monthly fall in Chinese stocks since
January 2016.
"The latest PMI readings suggest that the economy lost some momentum last month.
With credit growth still cooling and U.S. tariffs imminent, we expect further
weakness ahead," said Julian Evans-Pritchard, senior China economist at Capital
Economics.
Japan's June manufacturing PMI showed growth, but export orders contracted.
Together with BOJ's "tankan" survey, the data raises worries that the "Abenomics"
stimulus program is sputtering just as the government and the central bank
wanted to tap the brakes.
For graphic on Chinese markets had a bad month in June click https://reut.rs/2tDhc49
For graphic on major seaborne oil exports to Asia click https://reut.rs/2KD6Es5
(Editing by Catherine Evans)
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