Eurozone Manufacturing Slump Deepends, China Stalls


Euro zone manufacturing took another turn for the worse last month as output plummeted, hammering home the scale of the region's economic crisis which also depressed export orders from factories in China and India.

Surveys of thousands of factories across the world released on Wednesday showed activity in the 17-nation euro zone contracted for the eleventh straight month in July as a downturn that began in the periphery sinks deeper roots into the core.

The manufacturing slump worsened in Italy, Spain and Greece, but also in the region's two biggest economies France and Germany, the purchasing managers indexes (PMIs) showed. Britain's PMI plummeted to a more than three-year low.

In Asia's biggest economies China and India, which until recently had appeared more resilient to the effects of recession in Europe and disappointing growth in the United States, export orders were weak and output stalled.

"The euro zone continues to struggle with the debt crisis, while the world economy is slowing down. This last piece of information should give policymakers food for thought," said Peter Vanden Houte at ING.

But there was plenty of doubt over how much major non-Asian central banks meeting this week - the U.S. Federal Reserve, the European Central Bank and the Bank of England - will or can do to turn the tide.

Expectations are running high for another round of money printing from the Fed, although it probably will not happen until next month.

The ECB may fall short of lofty market hopes at its meeting this week, with insiders telling Reuters bold policy action could be weeks away, while the BoE is already in the middle of a money printing campaign it just increased to 375 billion pounds.

But in the meantime most of Europe's economies are sinking.

Markit's Eurozone Purchasing Managers' Index (PMI) for the manufacturing sector fell to 44.0, well below the 50 level that divides growth from contraction. The reading was the lowest since June 2009, below the flash reading of 44.1 and June's 45.1.

The output index sank to 43.4, the lowest since May 2009, also revised down from 43.6 and down from 44.7 in June. Markit said this pointed to production falling at a quarterly rate of more than 1 percent.

Across the channel in Britain, the manufacturing sector shrank at its fastest rate in more than three years, dealing a blow to hopes the country may come out of recession over the summer as it hosts the Olympic Games.

In the U.S., the Institute of Supply Management is expected to report later on Wednesday that its gauge of manufacturing popped back up above 50 in July after slipping to 49.7 in June on a slump in new orders.

Spain, which slid deeper into recession in the second quarter, saw the 15th straight month of contraction, while Italy chalked up a year in negative territory.

The PMI for Greece, where the debt crisis began, has been below 50 since September 2009. Even in once-booming Turkey, manufacturing activity contracted for the first time in four months.

The only bright spot was Ireland. It was the only euro zone country to show signs of emerging from the downturn, with its PMI above 50 for a fifth straight month.


China's official factory PMI fell to an eight-month low of 50.1 in July. The HSBC China PMI rose to 49.3, its highest level since February, but it was the ninth straight month below 50.

Analysts drew some comfort from the slight improvement in the HSBC China PMI, which focuses on smaller private enterprises while the official PMI primarily covers big state companies.

Unlike central banks in developed economies, China also has plenty of room to cut interest rates.

"The low inflation environment should allow Chinese authorities to provide further stimulus in coming months," said Craig James, economist at Commsec in Sydney.

Ten of China's 11 major sub-indexes in the official PMI were under 50, showing just how much the economy is struggling to revive its momentum, with little evidence of measures aimed at boosting domestic demand taking quick effect.

China, the world's second largest economy, faces a sensitive few months with a leadership succession looming later this year for the ruling Communist Party.

President Hu Jintao was quoted on Tuesday as saying fiscal and monetary policy support for the economy would be stepped up in the second half, while Premier Wen Jiabao spoke of policy fine-tuning and signs that the economy was stabilising, after growth slowed to its slowest pace in more than three years in the second quarter.

Manufacturing looked weak across Asia. Activity in South Korea shrank by the most in seven months, Taiwan contracted again and factories in India, Asia's third-largest economy, showed the sharpest one-month drop in growth since September.