Bloomberg News

Global Manufacturing Slump May Cause Central Bank Stimulus

September 01, 2011

(Updates with U.S. expansion in third paragraph.)

Sept. 1 (Bloomberg) -- Manufacturing slumped in Europe and Asia, adding to signs of slowing global growth that may keep a lid on inflation and encourage some central banks to step up stimulus measures.

Euro-area manufacturing contracted more than initially estimated in August while Chinese manufacturing growth stayed near a 29-month low, purchasing managers’ indexes showed. Similar gauges for Sweden, the U.K., South Korea and Taiwan all indicated contraction.

While manufacturing slumped in Europe and Asia, the Institute for Supply Management’s factory index released today unexpectedly showed U.S. expansion in August, dropping to 50.6 from 50.9 the prior month. A reading of 50 is the dividing line between expansion and contraction in manufacturing.

“Today’s data raise the specter of another global economic slump,” said Carsten Brzeski, senior European economist at ING Group in Brussels. “Everyone is looking to the central banks to bail them out. The question is whether central banks really want to go down that route again.”

Some Federal Reserve officials favor “more substantial” action to bolster U.S. growth beyond a pledge to keep interest rates at record lows for the next two years, minutes from their Aug. 9 meeting showed. The European Central Bank may revise its assessment that inflation risks are on the upside, President Jean-Claude Trichet signaled this week, paving the way for a halt in its policy tightening.

The Standard & Poor’s 500 index rose 0.5 percent to 1,225.08 at 10:11 a.m. in New York, after the ISM data were released, while the yield on the 10-year Treasury note rose to 2.25 percent from 2.22 percent late yesterday.

‘Basically Done’

In Asia, central banks may also be “basically done with their monetary policy tightening,” with Taiwan and India among the few that may still raise interest rates, said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “Slowing growth will ease some of the demand-side pressures across Asia” on consumer prices, Paracuelles said.

The global slowdown is damping demand for fuel, driving down oil prices that have been a key source of inflation. Crude has dropped to $88 a barrel from $114 per barrel in April.

The Bank of England’s Monetary Policy Committee has held off raising interest rates even with inflation running at more than twice its 2 percent target, choosing to give more weight to the faltering economic recovery.

The deteriorating outlook prompted Bank of England policy maker Martin Weale and Chief Economist Spencer Dale to abandon a push for a quarter-point rate increase at last month’s meeting. Some officials also debated whether there was a need to expand the bank’s bond-purchase program.

Protests in Asia

Inflation, which in South Korea reached a three-year high in August, has eroded consumers’ purchasing power across Asia, spurring protests from China to India. Any lasting sign of moderation in consumer prices may let some central banks shift toward considering an easing in policy, following Brazil’s interest-rate cut yesterday, said Tim Condon, head of Asia research at ING Groep NV in Singapore.

“We have seen the worst and inflation will slowly subside,” said Condon. “Some may even be thinking if they can ease monetary policy to stimulate the economy.”

International Monetary Fund Managing Director Christine Lagarde wrote in a Financial Times article on Aug. 16 that low interest rates and central banks’ readiness to “dive once more into unconventional waters” if required are necessary to ensure the global recovery doesn’t falter.

Recession Risk

A gauge of euro-area manufacturing fell to 49 in August from 50.4 in July, the first time in two years it has fallen below the 50 mark to signal contraction, London-based Markit Economics said today. The gauge for the U.K. also fell to 49 from 49.4, while Sweden’s index declined to 48.7 from 50.1.

Today’s data signal “an end to the manufacturing recovery,” said Markit chief economist Chris Williamson. “There is a growing risk that the euro zone could slide back into recession in the second half of the year.”

Growth in the 17-nation currency bloc slowed to 0.2 percent in the second quarter from 0.8 percent in the first as the region’s debt crisis weighed on confidence and the global slowdown curbed exports. Germany’s economy almost ground to a halt.

ThyssenKrupp AG, Germany’s largest steelmaker, on Aug. 12 reported fiscal third-quarter earnings that missed analysts’ estimates, citing slower global demand and “sharply” declining European consumption.

Fed officials last month discussed a range of ways to invigorate growth after the U.S. economy expanded at 0.7 percent average annual pace in the first half of the year, according to Federal Open Market Committee minutes released Aug. 31.

Bernanke’s Stance

Fed Chairman Ben S. Bernanke in an Aug. 26 speech stopped short of signaling further stimulus measures and said the economy will probably improve in the second half of 2011.

An index of Chinese manufacturing was at 50.9, up from 50.7, the China Federation of Logistics and Purchasing reported. Similar gauges for South Korea and Taiwan were at 49.7 and 45.2, below the expansion-contraction point of 50, according to data compiled by HSBC Holdings Plc and Markit.

“The risk of a global economic contraction has certainly intensified, though it’s not very likely at this stage,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “That helps on the inflation front, but central banks have different appetites for digging into their tool boxes to support growth.”

--With assistance from Simone Meier in Zurich, Scott Hamilton in London and Janina Pfalzer in Stockholm. Editors: Matthew Brockett, Fergal O’Brien

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Karl Lester M. Yap in Manila at kyap5@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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