Factories squeezed by rising prices and weak demand


Factories in Asia and Europe struggled to gain momentum in July as lower global demand and strict COVID-19 restrictions in China slowed output, surveys showed on Monday, likely adding to fears that economies could slide into recession.

A series of Purchasing Managers’ Indexes (PMIs) for July showed a drop in new orders in manufacturing powerhouses, particularly Northeast Asian tech giants and Germany, although they showed that price pressures could ease.

S&P Global’s final Manufacturing Purchasing Managers’ Index (PMI) for the euro zone fell to 49.8 in July from 52.1 in June, its first time below the 50 mark separating growth from contraction since June 2020.

An index measuring production, which feeds a composite PMI expected on Wednesday and considered a good indicator of economic health, fell to a low in more than two years at 46.3.

S&P Global said output was down in all surveyed eurozone countries other than the Netherlands and the rate of decline was particularly concerning in Germany, France and Italy – the bloc’s three biggest economies. .

Meanwhile, retailers in Germany ended the first half of 2022 with the biggest year-on-year sales decline in nearly three decades, as the cost of living crisis, war in Ukraine and the lingering effects of the coronavirus pandemic have taken their toll.

“I expect eurozone GDP to contract in the third quarter, but not as much as these retail sales or PMI data suggest,” said Holger Schmieding at Berenberg.

“It’s going to be tough, but it’s going to be tough from a stronger starting point.”

The bloc’s economy grew faster than expected last quarter, according to a first reading released on Friday.

A surge in global commodity prices amid supply chain disruptions caused by the pandemic and war in Ukraine has challenged businesses and policymakers around the world, with central banks rushing to tighten policy monetary policy and companies reducing their costs.

Last month, the European Central Bank raised interest rates more than expected as worries about runaway inflation took precedence over worries about growth.

The Bank of England is expected to raise borrowing costs by 50 basis points this week despite the country’s PMI showing manufacturing output and new orders fell in July at the fastest pace since May 2020.

In the United States, where the Federal Reserve raised interest rates aggressively, the economy unexpectedly contracted in the last quarter, raising the risk that the world’s largest economy is on the verge of a recession. A July Reuters poll gave a 45% chance of a eurozone recession within a year.

Asian strain

South Korea’s factory activity fell for the first time in nearly two years, while Japan saw its slowest activity growth in 10 months amid continued supply chain disruptions. supply.

Growth in activity in China has also slowed, the private sector Caixin PMI showed on Monday, despite some easing of strict national COVID-19 restrictions that hit the world’s second-largest economy in the second quarter.

Monday’s Caixin PMI followed an even bleaker reading from the official government PMI released on Sunday, which showed an unexpected drop in activity in July amid fresh COVID-19 outbreaks.

“The country was already facing a difficult challenge, to say the least, in terms of its growth target this year and the fact that manufacturing activity is slowing again does not bode well.” , said Craig Erlam of OANDA.

“One positive aspect of the surveys has been improved supply chain conditions, which should help fight inflation around the world.”

There was, however, positive news for the region, with PMIs indicating that input price growth moderated in China, Taiwan, India and South Korea.

Conditions in parts of Southeast Asia were also positive, with PMIs pointing to an acceleration in activity in Indonesia, Malaysia and Thailand, where growth in new orders bucked declines seen elsewhere in the world. the region.

India’s industrial activity grew at its fastest pace in eight months in July, also helped by solid growth in new orders and production and a sign that the South Asian economy remains resilient.

South Korea’s exports rose at a faster annual rate in July, as strong demand from the United States offset weak sales to China, according to separate trade data released on Monday.

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