Global factory output slumps as weak demand weighs

[July 03, 2023]  By Jonathan Cable and Leika Kihara

LONDON/TOKYO (Reuters) -Global factory activity slumped in June, business surveys showed on Monday, as sluggish demand in China and in Europe clouded the outlook for exporters.

Across the euro zone manufacturing contracted faster than initially thought, as persistent policy tightening by the European Central Bank squeezed finances, and in Britain the pace of decline steepened as optimism faded.

In Asia, while factory activity expanded marginally in China, it contracted in Japan and South Korea as Asia's economic recovery struggled to maintain momentum.

Data due later on Monday are expected to show a further contraction in the United States.

"There are no real signs we are going to get any rebound in the manufacturing sector this year. On the whole we are still talking about a negative assessment," said Rory Fennessy, European economist at Oxford Economics on the euro zone release.

Compiled by S&P Global, HCOB's final euro zone manufacturing Purchasing Managers' Index (PMI) fell to 43.4 from May's 44.8, its lowest since the COVID pandemic was cementing its grip on the world, below a preliminary reading and further from the 50 mark separating growth from contraction.

June's downturn was broad-based with surveys published earlier on Monday showing factory activity in all four of the euro zone's biggest economies contracted last month.

The S&P Global/CIPS UK Manufacturing PMI fell to 46.5 from 47.1 in May, its lowest reading this year and one of the weakest since the 2008-09 financial crisis.

ASIAN PAIN

Asia's surveys underscore the toll China's weaker-than-expected rebound from COVID lockdowns is inflicting on the region, where manufacturers are also bracing for the fallout from aggressive U.S. and European interest rate hikes.

"The worst may have passed for Asian factories but activity lacks momentum because of diminishing prospects for a strong recovery in China's economy," said Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute.

"China is dragging its feet in delivering stimulus. The U.S. economy will likely feel the pain from big rate hikes. These factors all make Asian manufacturers gloomy about the outlook."

China's Caixin/S&P Global manufacturing PMI eased to 50.5 in June from 50.9 in May, the private survey showed.

Employees work on the production line at Jingjin filter press factory in Dezhou, Shandong province, China August 25, 2022. REUTERS/Siyi Liu

The figure, combined with Friday's official survey that showed factory activity extending declines, adds to evidence the world's No. 2 economy lost steam in the second quarter.

The impact is being felt in Japan where the final au Jibun Bank PMI fell to 49.8 in June, returning to a contraction after expanding in May for the first time in seven months.

New orders from overseas customers decreased at the fastest rate in four months reflecting feeble demand from China.

South Korea's PMI fell to 47.8 in June, extending its downturn to a record 12th consecutive month on weak demand in Asia and Europe.

Factory activity also contracted in Taiwan, Vietnam and Malaysia, the PMI surveys showed.

There were bright patches among the economic indicators with India's manufacturing industry bucking the trend and expanding at a brisk pace in June, albeit slightly slower than in May, supported by robust demand.

The Bank of Japan's closely watched tankan survey also showed Japanese business sentiment improving in the second quarter as raw material costs peaked and the removal of pandemic curbs lifted consumption.

Asia is heavily reliant on the strength of China's economy, which saw growth rebound in the first quarter but subsequently fell short of expectations.

The fate of Asia's economy, including China's, will have a huge impact on the rest of the world with aggressive monetary tightening also expected to weigh on U.S. and European growth.

In forecasts released in May, the International Monetary Fund said it expects Asia's economy to expand 4.6% this year after a 3.8% gain in 2022, contributing around 70% of global growth.

But it cut next year's Asian growth forecast to 4.4% and warned of risks to the outlook such as stickier-than-expected inflation and slowing global demand.

(Reporting by Jonathan Cable and Leika Kihara; Editing by Sam Holmes and David Evans)

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