LDN - Business

Global factories struggled in July as demand waned, PMIs show

[August 01, 2024] By Jonathan Cable and Leika Kihara

LONDON/TOKYO (Reuters) - Manufacturers across Europe and Asia turned in a weak performance last month as factories grappled with tepid demand, surveys showed on Thursday, raising the risk of an underpowered global economic recovery.

It was a broadbased downturn in the euro zone while a slump in China's manufacturing activity suppressed its Asian neighbours. British factories bucked the trend and recorded their best month for two years, with output and hiring rising.

HCOB's final euro zone manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, held at June's 45.8 in July. It has been below the 50 mark separating growth from contraction for over two years.

An index measuring output, which feeds into a composite PMI due on Monday that is seen as a good gauge of economic health, dropped to a seven-month low of 45.6.

"The turn in the manufacturing inventory cycle has yet to materialise in a context of weak global demand, leaving the euro zone short of a clear growth driver as services are slowing," said Leo Barincou at Oxford Economics.

"Persistently weak industrial surveys pose a major downside risk to our forecast of an industrial pick-up in the second half of the year."

The downturn in Germany's manufacturing sector, which accounts for about a fifth of Europe's biggest economy, accelerated while in France the industry contracted at its fastest rate in six months.

In Britain, however, the index rose to 52.1, its highest reading since July 2022, as optimism builds after Prime Minister Keir Starmer's landslide election victory. The Bank of England looks in a position to cut interest rates later on Thursday after holding them at a 16-year high of 5.25% for the past year.

The Federal Reserve on Wednesday flagged a possible start to interest rate cuts as soon as September if the U.S. economy follows its expected path.

Having trimmed its deposit rate in June, the European Central Bank could follow up with two more cuts this year, a Reuters poll predicted.

ASIAN STRAIN

Manufacturing activity shrank in Japan and expanded at a slower pace in South Korea due partly to soft domestic demand and rising input costs, adding to the gloom from a contraction in China's factory activity.

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Employees work on a drilling machine production line at a factory in Zhangjiakou, Hebei province, China November 14, 2018. REUTERS/Stringer/File Photo

China's Caixin/S&P Global manufacturing PMI sank to 49.8 in July from 51.8 the previous month, the lowest reading since October last year and missing analysts' forecasts of 51.5.

The reading, which mostly covers smaller, export-oriented firms, was in line with an official PMI survey on Wednesday showing manufacturing activity slipped to a five-month low.

"Looking ahead, we expect a period of below trend global growth to weigh on manufacturing activity across Asia for the rest of this year," said Shivaan Tandon, markets economist at Capital Economics.

Japan's final au Jibun Bank Japan manufacturing PMI fell to 49.1 in July from 50.0.

Moving in the opposite direction to most other central banks, the Bank of Japan raised interest rates to levels unseen in 15 years on Wednesday and unveiled a detailed plan to slow its massive bond buying.

South Korea, another key regional export engine, fared better with the PMI standing at 51.4 in July, above the 50-mark for a third month but slowing from June's 26-month high of 52.0.

China poses a potential hurdle for business expansion in the region and while South Korea's July exports rose at the fastest pace in six months, helped by strong chip sales, they missed market expectations.

Elsewhere, factory activity expanded in Taiwan but also slowed slightly from June while India's manufacturing activity expanded at a solid pace thanks to continued robust demand.

(Reporting by Leika Kihara; Editing by Shri Navaratnam and Christina Fincher)

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