Crumbling global demand restrained factory output in Asia and most of Europe in January, business surveys showed on Wednesday, putting pressure on policymakers to shore up growth and counter a spreading malaise.
Asia’s export-reliant countries, while far more resilient, remain vulnerable to the euro zone’s messy sovereign debt crisis that threatens at best to tip the currency bloc into a recession and at worst to rip it apart.
Meanwhile, the first rise in German manufacturing output in seven months was not enough to offset prolonged contraction in the currency union’s smaller economies and suggests that the bloc will not avoid that recession.
“There is an awful long way to go yet and given that the headwinds that these economies face I would be cautious about being too optimistic,” said Peter Dixon at Commerzbank.
“Germany continues to motor on and show a reasonable amount of dynamism and that will drag France along and maybe Italy but it is not really going to help the likes of Greece. You need much more buoyancy from domestic demand which at the moment appears to be sadly lacking.”
The Eurozone Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, rose to 48.8 last month from 46.9, revised up from a flash reading but recording its sixth month below the 50 mark that divides growth from contraction.
French manufacturing contracted again in January, as did major economies Spain and Italy, as well as Greece and Ireland.
Data from Britain was decidedly more upbeat than the figures from continental Europe, showing its manufacturing sector unexpectedly grew in January. The PMI rose to 52.1 from 49.6, easily beating expectations for 50.0.
The official China PMI inched up to 50.5 in January from 50.3, which was welcome news. But the new export orders fell sharply, again underscoring the troubles in Europe.
“As the external demand is now fading clearly, Chinese exporters are facing increasing difficulties,” China’s Finance Minister Xie Xuren said in remarks on Wednesday.
The HSBC Markit PMI for China told the same if slightly more negative tale, holding at 48.8 in January.
“Chinese manufacturing has not yet reached a bottom. The trend so far has been consistent with our view that the current downturn will be shallower but more extended than the last downturn,” said Yao Wei at Societe Generale.
Comparable figures due later from the United States, the world’s biggest economy, are expected to show an uptick in activity as well. Economists in a Reuters poll expect a rise to 54.5 in the Institute for Supply Management index from 53.1.
South Korea’s manufacturing sector activity and new export orders both shrank for a sixth straight month in January, the longest losing streak in three years. In Taiwan, faltering exports bit into factory activity which shrunk for the eight straight month.
South Korean exports posted a shocking 6.6 per cent drop from a year earlier in January, far worse than the 0.7 per cent consensus in a Reuters poll. Its exports to the European Union tumbled 45 per cent in the first 20 days compared with the same period a year earlier.
Indeed, the euro zone is expected to be in recession during the first half of this year, according to a Reuters poll, but this assumes the debt crisis will not flare out of control.
Fears that Greece could face a disorderly default if it does not quickly secure a debt swap deal with private creditors, or that Portugal might require a second bailout, continue to rattle investors.
On Monday, most European Union states agreed to a German-led pact that will impose quasi-automatic sanctions on countries that breach EU budget deficit limits and will enshrine balanced budget rules in national law. That, however, will not solve euro zone countries’ immediate borrowing troubles.
US manufacturing expands in ISM Index
Manufacturing in the US grew in January at the fastest pace in seven months, adding to signs of a global pickup.
The Institute for Supply Management’s index climbed to 54.1, from 53.1 in December, the Tempe, Arizona-based group’s report showed on Wednesday. Other reports showed US construction spending increased at the fastest pace in four months and companies added 170,000 workers to payrolls in January.
Stocks rose on optimism the factory reports show the world economy is withstanding fallout from Europe’s debt crisis. Production, led by inventory rebuilding at the end of 2011, is poised to keep expanding in the US as the need to update equipment drives orders at companies like Caterpillar Inc and demand for cars rises.
US “manufacturing growth points to an acceleration in the economy,” said Conrad DeQuadros, a senior economist at RDQ Economics LLC in New York. “China is weathering weaker activity in Europe quite well.”
The Standard & Poor’s 500 Index climbed 1.1 per cent to 1,326.5 at 11.50 am in New York. The Stoxx Europe 600 Index advanced two per cent.
The yield on the benchmark 10-year US treasury note rose to 1.83 per cent from 1.8 per cent late yesterday.
The median forecast for the ISM index among 80 economists surveyed by Bloomberg News was 54.5. Estimates ranged from 53 to 56.
Caterpillar, the largest construction and mining equipment maker, last month posted fourth-quarter earnings and forecast full-year profit that topped analysts’ estimates as demand rose for earth-moving machinery and trucks. The Peoria, Illinois- based manufacturer said it had a record $29.8 billion backlog of orders at the end of 2011.
Chrysler Group LLC, the auto maker majority owned by Fiat SpA, said US sales rose 44 per cent last month, joining Nissan Motor Co and General Motors Co in beating analysts’ estimates for January.
Orders climb
The ISM’s new orders measure climbed to 57.6, the highest since April, from 54.8, and the gauge of export orders rose. Manufacturing accounts for about 12 per cent of the economy and was at the forefront of the recovery that began in June 2009.
Federal Reserve officials said in their policy statement last month that they may leave interest rates low until 2014, in part because “strains in global financial markets continue to pose significant downside risks to the economic outlook.”
Employment at companies climbed 170,000 in January, according to data on Wednesday by Roseland, New Jersey-based ADP Employer Services. The gain compared with a median forecast of 182,000 in a Bloomberg survey of economists and followed a revised 292,000 rise the prior month that was smaller than previously reported.
Construction spending increased 1.5 per cent in December, the biggest gain since August, helped by a jump in non-residential construction, commerce department figures showed on Wednesday. The median estimate of 51 economists in a Bloomberg survey called for a 0.5 per cent rise.
