NEW YORK/LONDON/HONG KONG (Reuters) - Factory activity slowed in the United States, Europe and Asia last month as an escalating trade war between Washington and Beijing raised fears of a global economic downturn and heaped pressure on policymakers to step up support.
Such growth indicators are likely to deteriorate further in coming months as higher trade tariffs take their toll on commerce and dent business and consumer sentiment, leading to job losses and delaying investment decisions.
Some economists predict a world recession and a renewed race to the bottom on interest rates if trade tensions fail to ease at a Group of 20 summit in Osaka, Japan, at the end of June, when presidents Donald Trump and Xi Jinping could meet.
The U.S.-China trade war, slumping car sales and Britain’s stumbling European Union exit took their toll on manufacturing activity last month.
U.S. manufacturing activity growth declined in May, separate surveys by the Institute for Supply Management (ISM) and IHS Markit Ltd showed. The ISM reading of 52.1 was a surprise decline and the worst showing since October 2016, while the Markit Purchasing Managers’ Index (PMI) was at its lowest level since the 2009 global financial crisis.
U.S. Commerce Department data on construction spending showed no change in April, disappointing expectations. But the report also included upward revisions of data from the first quarter.
The data was largely gathered before an escalation in trade tensions last week as U.S. President Donald Trump threatened new tariffs against Mexico. Trump also decided to end preferential trade treatment for India.
Markets appeared to price in higher chances of recession and rate cuts by the Federal Reserve and other central banks. Yields on the 10-year Treasury hit 2.071%, their lowest levels in more than 1-1/2 years, while traders pushed short-term interest rates futures to levels implying the Fed could begin cutting rates as soon as next month.
“There was a big change in the bond market,” Cornerstone Macro LLC researcher Roberto Perli wrote in a note. “We don’t like to utter the word ‘recession’ lightly, but the bond market reaction on Friday in response to the Mexico tariff news was ominous.”
Earlier data showed manufacturing activity contracting at a faster pace in the euro zone during May, British manufacturers seeing their steepest downturn in almost three years and contraction in Japan, South Korea, Malaysia and Taiwan.
Global PMI activity and trade: tmsnrt.rs/2WzqeyD
Manufacturing activity in Asia: tmsnrt.rs/2WEzX6W
After an official gauge on Friday showed contraction in China, the Caixin/IHS Markit Manufacturing PMI showed modest expansion, offering investors some near-term relief.
The outlook, however, remained grim as output growth slipped, factory prices stalled and businesses were the least optimistic on production since the survey series began in April 2012.
“The additional shock from the escalated trade tensions is not going to be good for global trade. In terms of the monetary policy response, almost everywhere the race is going to be to the downside,” said Aidan Yao, senior emerging markets economist at AXA Investment Managers.
The trade conflict between China and the United States escalated last month when Trump raised tariffs on some Chinese imports to 25% from 10% and threatened levies on all Chinese goods.
If that were to happen, and China were to retaliate, “we could end up in a (global) recession in three quarters”, said Chetan Ahya, global head of economics at Morgan Stanley.
Tensions flared again between the United States and China during the weekend over trade, technology and security.
China’s defense minister Wei Fenghe warned the United States not to meddle in security disputes over Taiwan and the South China Sea, while acting U.S. Defense Secretary Patrick Shanahan said Washington would no longer “tiptoe” around Chinese behavior in Asia.
“We take this seriously. It means that the trade war has not only become a technology war but also a broad-based business war. There will be more retaliation actions from China, especially for the technology sector,” said Iris Pang, Greater China economist at ING.
Editing by Simon Cameron-Moore and Gareth Jones and Chizu Nomiyama