In Europe: European outlook dims as Asia brightens

2 April 2012


“Euro zone economy remains extremely sluggish,” but “we should not be lulled into thinking that China has turned a corner either .”

An eighth straight month of contraction in the euro zone’s manufacturing sector eclipsed brighter news from Asia on Monday, dimming chances of a strong rebound in the global economy.

The downturn in Europe’s periphery members has spread to the core countries of Germany and France, according to purchasing managers’ indexes (PMIs) for March. The outlook is grim as new orders fell across the region for the tenth month.

But while still far from robust, factory activity strengthened in China, South Korea and Taiwan, three of the Asia’s leading exporters, as both export and domestic demand firmed.

“We are probably through the weakest for the global backdrop in terms of the major economies already, but they are now coming out at different paces,” said Jeavon Lolay, head of global research at Lloyds Banking Group.

“Asia is going to lead the global economy with the United States not too far behind, leading the developed economies, but Europe will be the laggard.”.

Data due later should show conditions improved in the United States, the world’s biggest economy. The Institute of Supply Management manufacturing Purchasing Managers’ Index (PMI) is expected to rebound slightly to 53.0 in March from February’s 52.4.

Markit’s Eurozone Manufacturing PMI dropped to 47.7 last month from 49.0 in February, in line with a preliminary reading. It has now been below the 50 mark that divides growth from contraction since August.

Earlier data from Germany, Europe’s largest economy, showed its manufacturing sector contracted last month and it was a similar story in neighboring France.

In Spain, struggling to implement singeing austerity measures demanded by the European Union to meet tough deficit targets, the sector contracted for the 11th month. Manufacturing in Italyshrank for an eighth month.

The economic slump will make it even harder for the 17-nation euro zone to overcome its debt crisis as it will depress tax revenues and hurt consumer spending.

Periphery countries have borne the brunt of the sharp downturn as their own austerity measures continue to hamper a return to growth, particularly Greece where the sharp decline in manufacturing continued last month.

“The euro zone economy remains extremely sluggish in Q1. Despite the ECB accommodative policy and efforts to boost confidence and liquidity conditions, the effects on the real economy have not materialized yet,” said Annalisa Piazza at Newedge Strategy.

Joblessness in the euro zone reached its highest in almost 15 years in February with more than 17 million people, or 10.8 percent, out of work, highlighting the human cost of the bloc’s debt crisis and governments’ struggle to overcome it.

In an effort to stimulate growth and boost liquidity, the European Central Bank has cut its main refinancing rate to a record low of 1.0 percent and pumped more than 1 trillion euros into the banking system. But is now expected to adopt a wait-and-see approach.

Across the channel, British manufacturing activity expanded at its fastest pace in 10 months in March, driven by a pick-up in new orders and increasing the chance that Britain’s economy grew in the first three months of 2012 and avoided a recession.

SINK OR SWIM

Asia’s economic fate remains closely tied to that of its export customers in the U.S. and Europe. Demand there still looks sluggish, even though the euro zone debt crisis poses less of an immediate threat to global economic stability and U.S. data has shown a bit more bounce.

The brighter Asian figures, released on Sunday and Monday, still suggested economic growth slowed in the first quarter of 2012. China appeared to be headed for its weakest quarter since early 2009, at the depths of the global financial crisis.

China’s official Purchasing Managers’ Index (PMI) hit an 11-month high with a stronger-than-expected reading but a separate private survey by HSBC, which focuses more on smaller factories than the large state-owned enterprises captured in the official data, painted a gloomier picture.

“The upside surprise in China’s manufacturing PMI is welcome, and should help quell excessive fears of a “hard landing” in China,” said Vishnu Varathan, an economist with Mizuho in Singapore.

“But equally, we should not be lulled into thinking that China has turned a corner either. Global conditions continue to be highly uncertain notwithstanding the stabilization in Europe and ‘green shoots’ in the U.S.”

HSBC’s PMI for South Korea edged up to a one-year high in March and in Taiwan, the figures showed a second straight month of improving business conditions.

But that wasn’t enough to get economists cheering.

“Don’t get carried away,” said Ronald Man, an economist with HSBC in Hong Kong who follows South Korea. “Further upward momentum requires expectations of higher new orders to materialize.”

In contrast to the rest of the region, factory activity in India faltered in March. Expansion in Asia’s third-largest economy slowed for a third straight month as growth in new orders eased and the cost for raw materials showed no signs of falling.

Adding to India’s worries, while growth is expected slow, the latest figures indicate a pickup in inflation which would make matters dicey for the Reserve Bank of India (RBI), which has often been criticized for being behind the curve.

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