GLOBAL ECONOMY-Global factories struggle as growth fears rise

Wed Aug 1, 2012 12:02pm EDT

Related Topics

* Spreading euro crisis plagues global economies

* Euro zone factory PMI hits lowest since June 2009

* China official PMI slips to eight-month low

* U.S. manufacturing contracts for second straight month - ISM

* Hopes fading for dramatic central bank action this week

By Steven C. Johnson and Jonathan Cable

NEW YORK/LONDON, Aug 1 (Reuters) - U.S. and euro zone factory activity slumped again in July while Chinese manufacturing hit an eight-month low, surveys showed on Wednesday, as economies worldwide showed signs of slowing.

The data may boost pressure on central banks to do more to stimulate growth. Economists suspect the Federal Reserve may move in that direction later on Wednesday, possibly by saying it won't raise U.S. interest rates until 2015.

Economic malaise was worst in the 17-country euro zone, where output plummeted and the manufacturing sector contracted for an 11th straight month as a downturn that began in smaller countries continued to spread into core euro area economies.

The slump worsened in Italy, Spain and Greece as well as the region's two biggest economies -- Germany and France.

Europe's economic woes also depressed export orders in China and India, where manufacturing had appeared to be holding up despite the euro zone debt crisis and slowing U.S. growth.

U.S. manufacturing, meanwhile, contracted for a second consecutive month, according to the Institute for Supply Management's index of national factory activity.

A separate report from Markit showed activity barely expanding and at its slowest pace in almost three years, partly due to lower European demand for U.S. products.

"The manufacturing numbers are pretty dismal. There's really no good way to read them," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "I think they bolster the case for more Federal Reserve action, and globally the argument is pretty much the same."

Added Peter Vanden Houte at ING: "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."

Even so, there was plenty of doubt over how much the Fed, European Central Bank and Bank of England will or can do to turn the tide.

Economists expect the Fed, which finishes a policy meeting later on Wednesday, to wait until September before launching another round of asset purchases.

Markets expect the ECB to do something as soon as Thursday, though insiders have told Reuters that bold policy action could be weeks away.

The Bank of England is already in the middle of a money-printing campaign, recently increasing it to 375 billion pounds.

EUROPE, U.S. STRUGGLE

Markit's Eurozone Purchasing Managers' Index 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. Output fell sharply.

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.

ISM said its U.S. manufacturing index stood at 49.8 in July, up slightly from June but still signalling contraction. Employment fell to a 2-1/2-year low.

Consumers appeared in no mood to make big-ticket purchases last month either. All three U.S. automakers reported lower-than-expected sales last month. The largest, General Motors Co, reported a 6 percent drop in sales.

In Brazil, weak global demand and an unfavorable exchange rate kept the HSBC Purchasing Managers' Index below 50.

WEAK ACTIVITY ACROSS ASIA

Europe's problems were being felt in Asia. China's official factory PMI fell to an eight-month low of 50.1 in July.

Analysts drew some comfort from the slight improvement in the HSBC China PMI, which rose to 49.3 and 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.

But 10 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.

Chinese 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 stabilizing.

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

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