European crisis hits world’s factories, Asian exports in June

LONDON WASHINGTON, (Reuters): The global economy is showing signs of deteriorating after manufacturing in the United States contracted in June for the first time in three years,

European factories took another hefty blow and China and Japan were hit hard by crumbling orders from abroad.

Business surveys released on Monday, covering thousands of factories across the world, suggested further trouble ahead for the crisis-stricken euro zone and for its trading partners.

Released after a European Union summit when leaders agreed to help Spain and Italy borrow more affordably, the purchasing managers indexes (PMIs) highlighted the problems policymakers face to restore the euro zone’s economic fortunes.

Joblessness in the currency union rose to a new record high in May, pushed up by lay-offs in France and Spain.

This and the PMIs added weight to expectations that the European Central Bank will ease monetary policy on Thursday by cutting interest rates 25 basis points, to a record low of 0.75 per cent.

Europe’s economic woes, triggered by a festering debt crisis, are increasingly weighing on global trade.

The U.S. manufacturing sector contracted in June for the first time in nearly three years, dragged down by a fall in new orders and a sharp drop in exports, the private Institute for Supply Management said.

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 The ISM’s index of factory activity fell to 49.7, just below the 50 mark that signals growth.

“There is no doubt that there are common driving factors now in the global slowdown and the euro area is probably the most dominant one,” said Jeavon Lolay, global economist at Lloyds Banking Group. “It is hitting confidence, it is hitting exports and it is probably hitting credit as well and bank lending.”

The weak U.S. factory data puts pressure on President Barack Obama ahead of his November reelection bid, and could fuel expectations of the Federal Reserve easing monetary policy further at its next meeting, which ends on August 1.

Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) was unchanged at 45.1 in June, holding at its lowest reading since June 2009.

Manufacturing activity in Germany and Spain contracted at the fastest pace in almost three years, and while French and Italian PMIs rose slightly, they were still below the 50 mark.

Around 17.56 million people were out of work in the 17-nation euro zone in May, or 11.1 per cent of the working population, a new high since euro area records began in 1995, the EU’s statistics office Eurostat said.

“Unemployment will continue to rise until we see an improvement in the economy, and that may not be until next year,” said Steen Jakobsen, chief economist at Saxobank. The jobs component of the PMI showed manufacturers cut staff at the fastest rate in two-and-a-half years in June.

Britain’s manufacturing sector contracted for the second straight month, albeit at a slower pace, doing little to alter expectations that the Bank of England will pump more cash into the struggling economy.

Europe’s economic ailments left Asian factories, which rely heavily on demand from rich Western states, reeling in June. The HSBC Chinese factory PMI showed factory activity shrank at its fastest pace in seven months in June. The index slipped to 48.2 from May’s 48.4.

“The further decline in the output, new orders, new export orders components suggests that the China economy still faces downside risks in the near term,” said Haibin Zhu, a JPMorgan economist in Hong Kong.

He said he expected Beijing to further ease monetary policy in the months ahead.

The run of weak data suggested no immediate pick-up for the world’s second-biggest economy, a story that is similar in Japan, home to big-brand exporters, such as camera and printer maker Canon Inc, which earns about 80 per cent of its revenues abroad.

Japan’s June PMI, released on Friday, slipped to 49.9. Its index for new export orders dropped to 47.5, the sharpest pace of contraction since February. The PMIs for South Korea and Taiwan showed their manufacturing sectors contracting for the first time in five months. In India, where the economy is more reliant on domestic activity, the factory sector picked up in June. But its new export orders growth was the weakest in seven months.