European factories bounce as Asia struggles, but Brexit poses threats

An employee works on an assembly line producing automobiles at a factory in Qingdao, Shandong Province, China - REUTERS

London/Sydney (Reuters): Factories across Europe enjoyed a buoyant month in June but that growth could be under threat after Britons voted to leave the European Union last week, surveys conducted almost entirely before the historic referendum showed.

Highlighting another worrying trend for the global economy, China’s vast factory sector flatlined as exports shrank and jobs were cut, in a slowdown across Asia that could lead to yet more policy stimulus as doubts grow over the potency of measures taken so far.

The hard times signalled by a range of surveys was not what the world needed a week after Britain voted to leave the EU, condemning the bloc to months if not years of political and economic instability.

“The unimaginable has happened and the UK vote will cast a long shadow over the UK, Europe and global markets for some time to come,” warned Westpac head currency strategist Robert Rennie. “A structurally weaker pound, a softer euro and weaker global growth beckons.”

Markit/CIPS reported a surprisingly strong reading of 52.1 in June for their UK Manufacturing Purchasing Managers’ Index (PMI), up from May’s 50.4. That was the strongest reading since January and better than all forecasts in a Reuters poll of economists, which produced a consensus view of 49.9.

But data company Markit warned “almost all” the data from manufacturers used in its survey were received before the June 23 referendum.

“Leaving the EU threatens the loss of 50 free trade agreements with other countries, as well as restricted access to the single market itself,” said Samuel Tombs at Pantheon Macroeconomics.

“In short, then, the UK’s meagre manufacturing sector - which accounts for just 10% of GDP - is not going to prevent the overall economy slipping into recession.”

Bank of England Governor Mark Carney said on Thursday the central bank would probably need to pump more stimulus into Britain’s economy over the summer to cope with the shock of the vote.

June was also stronger across the euro zone, where factory activity expanded at its fastest rate this year as discounting helped drive up new orders and output, encouraging companies to hire more people to meet the demand. The Markit PMI for the euro zone climbed to 52.8 from May’s 51.5, higher than the earlier flash reading of 52.6. Anything above 50 indicates growth.

“However, euro zone manufacturers will be worried that demand in both domestic and foreign markets could be significantly weakened by heightened uncertainty following the UK’s vote,” said Howard Archer at IHS Global Insight.

Among other surveys out on Friday, China’s official PMI slipped a tick to 50.0 in June, dead on the level that is divides growth from contraction. One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month trough of 48.6 in June. That had to be a disappointment to Beijing, which has resorted to ever-looser fiscal and monetary policy to support growth and jobs in the world’s second largest economy.

It was a frustration likely shared by the Bank of Japan, which found major manufacturers in a morose mood despite all its attempts at aggressive easing.

The reasons were clear in the Markit/Nikkei measure of Japan’s PMI, which edged up slightly to 48.1 in June but stayed in contractionary territory for the fourth straight month.

Government data were no better, with household spending down for the third month in a row and core consumer prices suffering their biggest annual drop since 2013.

News from South Korea was relatively cheery as its PMI reached a six-month high, yet at 50.5 it was just barely into expansionary territory.

Indeed, a separate report showed shipments from the world’s sixth-largest exporter fell for an 18th straight month in June.

Likewise, electronics powerhouse Taiwan reported some improvement but again growth was only marginal.

India’s PMI did hit a three-month high but it remains an outlier in an Asian region which could face a whole new threat should the Brexit vote herald a wider retreat from free trade.

Vaninder Singh, an economist at Royal Bank of Scotland in Singapore, noted the region had been the greatest beneficiary of globalisation and any shift to trade barriers or closed borders would hurt Asia the most.

“Overall, what is clear to us is that the impact, will be limited in the near-term, but much more significant in the medium-term,” said Singh.

“We expect this event and what it represents to subtract as much as 0.3% from growth next year compared to our pre-event baseline and expect Asian central banks to respond with another round of easing.”