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Waning demand hits factory activity across Asia and Europe
October 1, 2014 / 11:14 AM / 3 years ago

Waning demand hits factory activity across Asia and Europe

BANGALORE/SYDNEY (Reuters) - Dwindling demand cut factory activity across much of Asia and Europe in September, sending it to multi-month lows and raising the chances that global growth will slow in the months ahead.

An employee works in the packaging section at the Playmobil Malta factory in the Hal Far Industrial Estate outside Valletta April 11, 2014. REUTERS/Darrin Zammit Lupi/Files

Despite gentler price rises, China’s figures were mired barely above contraction, Britain slumped, and the drop in new orders did not even spare Germany, the strongest member of the euro zone currency bloc, or France, its No. 2 economy.

With growth faltering, the data will dishearten policymakers in the 18-nation union as they struggle to revive inflation.

Euro zone factories’ final September PMI was 50.3, a further slackening in pace and its lowest reading since July last year, as new orders contracted for the first time in more than a year.

“It is very hard to put any positive spin on the September PMI survey and contracting new orders do not bode well for manufacturing output in the fourth quarter,” IHS Global Insight economist, Howard Archer, said.

The contraction came despite factories cutting prices for the first time since April. Preliminary data on Tuesday showed euro zone inflation slowed further in September to just 0.3 percent, the lowest since the height of the financial crisis. [ID:nL6N0RV1TO]

While the European Central Bank (ECB) is unlikely to move rates on the back of the lower inflation print at its meeting on Thursday, President Mario Draghi is expected to announce details of the ECB’s asset-backed securities purchase programme.

But the clamour is growing louder for the bank to conduct full-blown quantitative easing (QE), involving buying sovereign bonds, as Britain, Japan and the United States have done, to thwart risks of deflation and revive growth.

Economists gave a 40-percent probability of such a move in a Reuters poll last week. [ECB/INT]

“We suspect that there is still appreciable reluctance within the ECB’s Governing Council to engage in full blown QE, so it will only occur if the euro zone returns to recession and consumer price inflation trends down further,” Archer said.

FROM EUROPE‘S ENGINE TO ASIA‘S POWERHOUSES

In Germany, factory activity shrank for the first time in 15 months in September suggesting the engine of the euro zone economy may be running out of steam. In France the sector contracted for the fifth month running.

France defied its European Union partners on Wednesday with a 2015 budget setting out how it would bring its borrowing back to within EU limits two years later than promised, a retreat it blamed on a fragile economy. [ID:nL6N0RW0RF]

In Britain, manufacturing grew at the slowest rate in 17 months in September as demand weakened at home and in Europe, a slowdown that is likely to be noticed by the Bank of England when it debates when to start raising interest rates next week.

Meanwhile, U.S. factory activity is expected to show robust signs of growth in figures due out later on Wednesday that are likely to reinforce expectations of a rate hike by the Federal Reserve in the second quarter of next year.

The downturn extended to Asia, with China’s official PMI of activity staying stuck at 51.1 in September, only modestly above the 50 level that separates growth from contraction.

China this week cut mortgage rates and downpayment levels for some home buyers for the first time since the global financial crisis, escalating efforts to boost an economy threatened by the sagging housing market. [ID:nL3N0RV3IG]

Beijing has for some time found it can no longer rely on exports and manufacturing as an engine for growth.

In India, factory activity expanded at its slowest pace this year in September on slowing new orders and output growth, while in South Korea manufacturing activity shrank, fuelling fresh doubts about the strength of its economic recovery.

The slowdown in Asia comes at a time of subsiding price pressures. While that is sure to benefit consumers, it could hurt output as firms slash production to remain competitive.

And with manufacturers worldwide struggling, demand fears sent oil prices to their lowest in more than two years this week, iron ore a five-year trough and copper a four-month low - all likely to intensify disinflation risks in Asia and Europe.

Editing by Louise Ireland

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