Shrinking factory numbers stoke recession fears

London

FACTORY activity contracted across Asia and Europe last month as an escalating trade war between Washington and Beijing raised fears of a global economic downturn and heaped pressure on policymakers to roll out more stimulus.

Such growth indicators are likely to deteriorate further in the coming months as higher trade tariffs take their toll on global commerce and further dent business and consumer sentiment, leading to job losses and delays in 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 US-China trade war, slumping car demand, Brexit and wider geopolitical uncertainty took their toll on manufacturing activity in the eurozone last month. It contracted for a fourth month in May - and at a faster pace.

"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.

IHS Markit's May final manufacturing Purchasing Managers' Index for the eurozone was 47.7, below April's level and only just above a six-year low in March.

In Britain, the Brexit stockpiling boom of early 2019 gave way last month to the steepest downturn in British manufacturing in almost three years as new orders dried up, boding ill for economic growth in the second quarter.

After an official gauge on Friday showed contraction in China, Asia's economic heartbeat, 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.

Central banks in Australia and India are expected to cut rates this week, with others around the world seen following suit in coming weeks and months.

US manufacturing growth slowed further in May to its weakest pace of activity in more than two-and-a-half years, defying expectations for a modest rebound. The Institute for Supply Management said its US Manufacturing Purchasing Managers Index declined to 52.1 from 52.8 in April, marking the lowest level since October 2016.

JP Morgan now expects the Federal Reserve to cut rates twice this year, a major change from its previous forecast that rates would stay on hold until the end of 2020.

Meanwhile, Monday's survey adds to evidence that the eurozone economy is under pressure and will likely be of concern to policymakers at the European Central Bank (ECB), who have already raised the prospect of further support.

There is little likelihood of them hiking interest rates before 2021, according to economists in a Reuters poll last week. They said the bank's next policy move would be to tweak its forward guidance towards more accommodation.

The trade conflict between China and the US escalated last month when Mr Trump raised tariffs on some Chinese imports to 25 per cent from 10 per cent 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.

Washington's new tariff threats against Mexico last week also contributed to global recession fears, with stock markets tumbling around the world. The 10-year US Treasuries yield fell to 2.121 per cent, a nadir last seen only in September 2017.

Tensions flared again between the US and China over the weekend concerning trade, technology and security.

China's Defence Minister Wei Fenghe warned the US not to meddle in security disputes over Taiwan and the South China Sea, while acting US Defence Secretary Patrick Shanahan said Washington would no longer "tiptoe" around Chinese behaviour in Asia.

Said Iris Pang, Greater China economist at ING: "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." REUTERS

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