July 2, 2012 / 2:58 PM / 5 years ago

GLOBAL ECONOMY-European crisis hits world's factories in June

* U.S. ISM manufacturing index shows contraction in June
    * Euro zone factory PMI holds at 2-1/2-year low
    * PMIs fall across Asia to multi-month lows, except India
    * Exports orders falling in U.S., China, Korea, Taiwan

    By Yati Himatsingka and Jason Lange
    LONDON/WASHINGTON, July 2 (Reuters) - Europe's debt crisis
slammed into the world's factories last month, with U.S.
manufacturing contracting for the first time in nearly three
years and Asian countries hit hard by crumbling orders from
    Some of the most grim data released on Monday was from the
euro zone. The jobless rate in the currency bloc rose to a
record high in May while a measure of factory activity held
steady at its lowest level since June 2009.
    Other factory surveys - from the United States to China and
Brazil - suggested Europe's woes were reverberating throughout
the global economy.
    "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 U.S. factory sector was dragged down in June by a plunge
i n new orders and a sharp drop in exports, the private Institute
for Supply Management said. The ISM's index of factory activity
fell to 49.7, just below the 50 mark that signals growth.
    "This is the biggest sign yet that the U.S. is catching the
slowdown that is well underway in Europe and China," said Paul
Dales, an economist with Capital Economics in London. 
    The weak U.S. factory data puts pressure on President Barack
Obama ahead of his November re-election bid, and could fuel
expectations of the Federal Reserve easing monetary policy
further at its next meeting, which ends on August 1.
    In Europe, Markit's Eurozone Manufacturing Purchasing
Managers' Index (PMI) was unchanged at 45.1 in June, 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.
    Released after a European Union summit where leaders agreed
to help Spain and Italy borrow money, the euro zone data
highlighted the problems policymakers face to restore the
region's economic fortunes.
    Around 17.56 million people were out of work in the
17-nation euro zone in May, or 11.1 percent 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 euro zone PMI showed manufacturers
cut staff at the fastest rate in two and a half years in June.
    This and the PMIs added weight to expectations that the
European Central Bank will c ut interest rates on Thursday to a
re cord low of 0.75 percent. 
    Britain's manufacturing sector contracted for the second
straight month, albeit at a slower pace, reinforcing
expectations the Bank of England will pump more cash into the
struggling economy. 
    Europe's economic ailments, triggered by a festering debt
crisis, left Asian factories 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 percent 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 factory
sectors contracting for the first time in five months.
    Latin America is also feeling the pinch. Manufacturing in
Brazil, the largest economy in the region, shrank for the third
straight month in June. 
    Some countries are faring better, at least for now. 
    In Mexico, demand from the United States led manufacturing
to step up its pace of expansion last month. 
    And in India, where the economy is more reliant on domestic
activity, the factory sector picked up in June. Still, growth in
new export orders in India was the weakest in seven months.

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