Global economic rebound yet to show as manufacturing weakens

[WASHINGTON] The global economic rebound expected to happen this quarter is staying out of reach for now outside of the US.

After policy makers around the world were quick to shrug off weakness at the start of the year as a temporary phenomenon, their economies are keeping them in suspense, with purchasing managers indexes from Japan to the euro area hinting on Wednesday at a more protracted slowdown. Add risks including trade tensions due to US tariffs, controversy over Iran policies and Italy's struggles to form a government to the recipe of reasons for caution.

The upside is the US showed signs of robustness. Its manufacturing index rose to 56.6 in May from 56.5, IHS Markit reported. A gauge of services rose to 55.7 from 54.6

All these elements will play into the thinking among monetary-policy officials as they look to unwind crisis measures. At the European Central Bank, news of less optimistic businesses and weaker growth in new orders, hiring and backlogs of work may delay a decision to scale back unprecedented support until officials can better assess economic health. In Japan, dwindling manufacturing momentum underpins the central bank's commitment to add stimulus.

Also on Wednesday, the Federal Reserve publishes the minutes of its latest policy meeting, which will provide clues on how many more interest rate hikes are likely this year.

The Markit report attributed the latest weakness to the number of public holidays, after bad weather, strikes and a flu epidemic weighed at the start of the year. But the continued disappointing readings - along with headwinds such as higher oil prices - raise questions.

The figures "challenge the view that the economy is experiencing only a temporary soft spot," said Anders Svendsen, an economist at Nordea Markets in Copenhagen. "The June meeting will come too early, and the ECB will wait until the July meeting before making the next important decisions on the future of its monetary policy."

The weakness is less apparent in the US, which has been attributed in part to the boost from Donald Trump's tax cuts. UBS Chairman Axel Weber, a former ECB policy maker, said Tuesday that this will help "drive the economy forward."

"We know we're late cycle, Europe's rolling over, the UK is rolling over, the US is doing fine because it's got a fiscal shot in the arm and that's a big part of the difference," Michael Metcalfe, head of macro strategy at State Street Global Markets, said on Bloomberg Television.

So far in Europe, policy makers are putting a brave face on the slowdown, saying there's no sign of a durable softening in demand.

They are, however, paying close attention to the stock of orders at companies for any early warning signs. Data so far suggest that order growth is slowing because of constraints in equipment and personnel rather than sluggish demand - a development that could be welcomed at the ECB as it might prompt companies to boost investments and raise prices.

"The economy is not the problem," ECB Governing Council member Jozef Makuch said at a conference in Bratislava, pointing to political concerns over Italy and the US. "Global risks are present and this is the biggest challenge we're facing."

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