Factories struggle as world demand sputters

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LONDON/SYDNEY: British manufacturers slammed on the brakes last month after the Brexit vote and growth eased in the euro zone, surveys indicated, with factories in China, Japan and elsewhere in Asia offering only crumbs of comfort.

A US version due later Monday would have to be unexpectedly robust to make up for a downbeat GDP reading released last week.

The latest UK Purchasing Managers’ Index, compiled by Markit, will give the Bank of England more impetus to cut interest rates after it surprised markets by holding fire in July but said most policymakers were leaning towards stimulus in August.

“Markit said that the deterioration was widespread across sectors and firm sizes, suggesting that Brexit uncertainty was weighing on many firms. The overall negative tone of the survey reinforces the case for a monetary loosening at Thursday’s MPC meeting,” said Scott Bowman at Capital Economics.

All but three of 49 economists in a Reuters poll last week expect the Bank to cut interest rates by at least 25 basis points on Thursday, but economists were divided on whether it would restart its bond-buying program.

Signs of a sharper slowdown in the euro zone, outside powerhouse Germany, may also add to calls for the European Central Bank to loosen policy again after it kept interest rates unchanged last month.

The ECB did leave the door open to more stimulus, highlighting “great” uncertainty and abundant risks to the economic outlook. A Reuters poll found that it will soon be forced to extend and expand the scope of its asset purchase program.

The fitful global performance was clearly on the mind of William Dudley, a top policy maker at the Federal Reserve, who used a speech in Indonesia to urge caution on raising US interest rates.

Dudley, a close ally of Fed Chair Janet Yellen, warned of potential negative shocks due to the unknown fallout from Britain’s vote to leave the EU, a strong dollar, and because it was safer to delay a move with interest rates so low.

Global stocks hit their highest in almost a year on Monday as investors pared back expectations of when US interest rates would rise.

Among the slew of surveys out on Monday, the Markit/CIPS UK manufacturing PMI slumped to 48.2 in July from June’s 52.4, its lowest since February 2013 and well below the 50 mark that separates growth from contraction.

Data covering the post-Brexit period have been scarce so far but there are signs consumer confidence is struggling and a Reuters poll of economists suggested Britain will slide back into recession in the coming year.A factory PMI for the euro zone fell to 52.0 in July from 52.8, just beating a flash estimate of 51.9, but compiler Markit said the modest reduction masked the fact that growth was looking increasingly lop-sided and centered in Germany.

Further afield, China’s official PMI slipped a tick to 49.9 in July. “Today’s data do not bode well for GDP growth,” wrote ANZ economist Louis Lam in a note.

“The traditional manufacturing sector is likely to continue to face strong headwinds as efforts to reduce overcapacity continue,” he added. “Thus, we expect the authorities to maintain an accommodative monetary policy.”

Source: Reuters

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