You are here

Weak factory reports from Asia, Europe suggest more central bank action

[LONDON/SYDNEY] The global economy ended 2014 in a fragile state as factories struggled to maintain growth across Europe and Asia, business surveys showed, adding to pressure on central banks to implement more stimulus.

Ebbing price pressures across the continents offers room for the People's Bank of China and the European Central Bank to do more to drive up inflation and support growth.

"Growth really does appear to be stalling based on these indicators so certainly the pressure is on, although we are less worried about China," said James Knightley, senior global economist at ING.

On Thursday, ECB President Mario Draghi fanned expectations he would take bolder steps this month, saying the central bank stood ready to respond to the risk of deflation. Consumer price data for the eurozone due on Jan 7 is widely expected to show a fall in annual terms.

"With inflation set to fall sharply further, given what is happening to energy costs, those concerns that Draghi highlighted suggests we are going to get quantitative easing," Mr Knightley said.

Your feedback is important to us

Tell us what you think. Email us at

The risk of a deflationary spiral, alongside a stagnating euro economy, will push the ECB to buy sovereign debt early in 2015, a Reuters poll showed last month.

The ECB council meets on Jan. 22 and markets are wagering heavily it will finally decide to start buying sovereign debt, a major reason the euro hit 4-1/2 year lows on Friday.

Eurozone manufacturing concluded last year on a subdued note as output, new orders and employment all recorded sluggish growth. Also of concern to policymakers, activity was weak in Germany, Europe's largest economy, while the downturn also deepened in France, the euro bloc's second-biggest.

Markit's final December manufacturing Purchasing Managers'Index stood at 50.6, down from an earlier flash reading of 50.8 but beating November's 17-month low of 50.1.

That is above the 50 mark that separates growth from contraction, but there was little sign of any improvement this month, with the subindex for new orders at just 50.2, leading factories to barely increase headcount in December.

British manufacturing expanded at a much weaker pace than expected in December, suggesting its contribution to the economic recovery ebbed further in the final months of 2014.

Global exporters should get some relief as the US shifts into higher gear, although they did not benefit as much from 2014's recovery in the world's biggest economy as they have in the past.

The US Federal Reserve has indicated it will start raising rates from rock bottom later this year as long as the economy continues to improve and unemployment falls further.

A US Institute for Supply Management measure of manufacturing is due later on Friday and is expected to show a still strong reading around 57.6 for December.

China's massive factory sector looked to have sputtered in December and across the region manufacturers struggled with weak demand, both at home and abroad.

China's official PMI slipped to 50.1 in December from November's 50.3, its lowest level of the year.

While the PMI for China's services sector, which accounts for close to half of the economy, edged up to 54.1 from November's 53.9, many analysts suspect 2014 economic growth has undershot the government's 7.5 per cent target, marking the weakest expansion in 24 years.

With factories able to make more than consumers wanted to buy, the pressure was intense to cut prices. "The price measures show very strong disinflationary forces," said analysts at Nomura. "We expect more policy easing in the first quarter, including a 50-basis-point cut in the bank reserve requirement ratio, to shore up domestic demand."

In India, too, inflation has slowed to only 4.38 per cent annually, the lowest since the government started releasing the data in 2012.

"With the disinflationary trend gaining ground, the Reserve Bank of India is expected to find space for some rate cuts in 2015," said Pranjul Bhandari, chief India economist at HSBC.

In South Korea, consumer prices grew at the slowest clip in more than 15 years in December, opening the door for further rate cuts there.


BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to