Economy

Factories Face Challenges as Global Demand Declines, Reports Reuters

By Jonathan Cable and Wayne Cole

LONDON/SYDNEY – British manufacturers abruptly slowed down last month following the Brexit vote, while growth in the euro zone also eased, according to recent surveys. Factories in China, Japan, and other areas of Asia provided little reassurance.

A U.S. report due later today would need to be exceptionally strong to mitigate the disappointing GDP figures released last week.

The latest UK Purchasing Managers’ Index (PMI) from Markit is expected to give the Bank of England added motivation to lower interest rates. The Bank surprised markets by not acting in July but indicated that most policymakers are now favoring stimulus measures in August.

Markit highlighted that the decline was widespread across various sectors and company sizes, suggesting that uncertainty surrounding Brexit is negatively impacting many businesses. Scott Bowman from Capital Economics noted that the survey’s overall negative tone bolsters the case for a monetary policy easing during Thursday’s Monetary Policy Committee meeting.

In a recent Reuters poll, nearly all but three of the 49 economists anticipate the Bank of England will cut interest rates by at least 25 basis points on Thursday, although opinions were mixed regarding a potential restart of its bond-buying program.

Additionally, indications of a sharper slowdown in the euro zone, outside of Germany, may heighten calls for the European Central Bank to further loosen its policy. The ECB had kept interest rates unchanged last month but left the possibility for more stimulus on the table due to significant uncertainty and risks surrounding the economic outlook. A notable finding from a Reuters poll suggests that the ECB may soon be compelled to extend and broaden the scope of its asset purchasing efforts.

Concerns about the global economic landscape were echoed by William Dudley, a prominent Federal Reserve policymaker, who advised caution regarding any increase in U.S. interest rates during a speech in Indonesia. Dudley, a close ally of Fed Chair Janet Yellen, voiced worries over potential negative impacts stemming from the Brexit decision, a strong dollar, and the appropriateness of delaying rate hikes given the currently low interest rate environment.

Global stocks reached their highest levels in almost a year on Monday, as investor expectations regarding the timing of U.S. interest rate increases were adjusted.

Among the various surveys released on Monday, the Markit/CIPS UK manufacturing PMI fell to 48.2 in July from June’s 52.4, marking its lowest point since February 2013 and falling below the crucial 50 mark that distinguishes growth from contraction.

Data pertaining to the period following Brexit has been limited, yet there are early signs that consumer confidence is faltering. A Reuters poll conducted among economists suggested that the UK may face a return to recession within the next year.

In the euro zone, the factory PMI declined to 52.0 in July from 52.8, barely surpassing a preliminary estimate of 51.9. However, Markit noted that this modest decrease obscured the reality that growth was increasingly uneven, with much of it concentrated in Germany.

In China, the official PMI experienced a slight dip to 49.9 in July.

ANZ economist Louis Lam remarked that the current data does not bode well for GDP growth, citing the ongoing challenges faced by the traditional manufacturing sector due to efforts to reduce overcapacity. As a result, he expects the authorities to maintain a supportive monetary policy stance.

On a more positive note, the private Caixin version of the PMI, which includes a greater proportion of smaller firms, rose to 50.6 in July from 48.6 in June, marking the first expansion in 17 months. China’s extensive services sector also showed a mild improvement in activity, as Beijing aims to shift towards services to offset ongoing manufacturing difficulties.

In Japan, however, a significantly strong yen led to a marked decline in new export orders, falling at the fastest rate seen in over three and a half years, according to IHS Markit/Nikkei. Although the overall PMI edged up to 49.3, it remained in contraction territory.

Japanese exporter stocks were already under pressure following the Bank of Japan’s recent decision against substantial monetary easing, which had surprised market expectations and led to a surge in the yen. The BoJ is now set to review its entire easing strategy ahead of the next policy meeting on September 21.

This may raise expectations for a more aggressive approach, but HSBC economist Frederic Neumann counsels caution, suggesting that the BoJ may have reached the limits of its current policy framework.

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