Friday, July 01, 2011

Global economic recovery slips into lower gear as industrial activity dips

The manufacturing boom that has spurred the global recovery of the last 18 months dropped into a lower gear last month as the UK, the eurozone and China registered a significant drop in growth.

Britain's manufacturing sector expanded at the slowest pace in nearly two years while the eurozone, dragged down by Italy and slowing Germany activity, fell from 54.6 points in May to an 18-month low of 52 in June.

A PMI reading above 50 indicates an expansion in manufacturing activity, while a reading below 50 indicates contraction.

China's main index of activity dropped to a low of 50.9 in June, a position that analysts fear could show contraction next month if a slide registered in recent months continues .

The general slowdown will pose a dilemma for central bankers who are all poised to raise rates to combat rising inflation.

A succession of weak indicators in the UK has in effect taken interest rate rises off the table, with the Bank of England governor Sir Mervyn King hinting that a rise is unlikely until at least the new year.

However, the European Central Bank gave its firmest indication it will raise rates for a second time to 1.5% next week, despite vociferous complaints from many countries still in recession that a shift to higher rates will choke off their recoveries.

Several left and rightwing commentators in Spain, Italy, Portugal and Ireland argue higher interest rates are solely designed to keep the German export boom in check without regard to their own recession hit economies.

Ireland's manufacturing sector shrank for the first time in nine months, while Italy, which has struggled to expand, saw its key manufacturing sector contract. Russian manufacturing expanded at its slowest pace in 15 months in June after the headline reading fell to 50.6 from 50.7 the previous month, its weakest since March 2010.

A sharp bounce in stock markets following agreement in the Greek parliament to pursue EU-sponsored austerity measures became more muted after it became clear a global slowdown in manufacturing was firmly under way.

"Over the past two months, [euro-zone manufacturing] output growth has weakened to the greatest extent since late-2008," said Chris Williamson, chief economist at Markit, which compiled the surveys.

The US was the only bright spot, adding to expectations the economy may be recovering from a recent slowdown. The US Institute for Supply Management said its index of national factory activity rose to 55.3 from 53.5 the month before. The reading beat expectations for a decline to 51.8, according to a Reuters poll of economists.

The UK's Markit/CIPS purchasing managers' index showed a bigger than expected drop to 51.3 from 52 in May, revised from 52.1.

David Noble, chief executive at the Chartered Institute of Purchasing & Supply, said: "The UK's manufacturing sector is slipping into 'growth-lite' mode, a far cry from the strong expansion seen earlier in the year."

For the second quarter as a whole, the average PMI reading of 52.6 is the lowest since the recovery began in the autumn of 2009. Export orders and employment slowed to the weakest growth rate since last September.

Rob Dobson, senior economist at Markit, said: "It is worrying to see that slowdown is not just being driven by the demise of domestic market strength, with growth in new exports having also slowed since the start of the year as the global economic recovery drifts into a softer patch."

Input price inflation slowed sharply to the slowest rate in one-and-a-half years, reflecting recent falls in the cost of oil and other commodities. Output price inflation – measuring the prices charged by manufacturing – was the weakest since last December.

China's factory production dropped to a 28-month low of 50.9 in June.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, was hopeful the recovery remained on track.

"Despite the pace of expansion in [UK] activity easing for the fifth month running this shouldn't be overplayed. Behind the headline the figure the detail shows production, export orders and employment all still edging up, albeit at a more subdued pace than earlier in the year," she said.

Source: http://www.guardian.co.uk

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