Euro Zone Manufacturing Stagnates Amid Global Mixed Signals

By Jonathan Cable and Leika Kihara

LONDON/TOKYO (Reuters) – Factories in the euro zone remained mired in contraction last month, surveys showed. The data suggests a recovery could be some way off, but Asian and British manufacturers showed tentative signs of recovery.

However, analysts say prospects of slowing U.S. growth, likely leading to interest rate cuts by the Federal Reserve this month, along with uncertainty over the presidential election there, cloud the trade outlook.

HCOB’s final euro zone manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, stood at 45.8 in August, just ahead of a 45.6 preliminary estimate, but well below the 50 mark separating growth from contraction.

“The final August manufacturing PMI reading was yet another indication the recovery of the industrial sector will neither be immediate nor vigorous, as the euro zone index remains stuck in contractionary territory,” said Riccardo Marcelli Fabiani at Oxford Economics.

A PMI covering new orders sank to its lowest since December, while demand from abroad also fell at the fastest rate this year. That decline occurred as euro zone manufacturers raised their prices for the first time in 16 months, driven by factories in France, the Netherlands, Greece, and Italy.

Still, overall inflation in the currency bloc fell to a three-year low of 2.2% in August, preliminary official data showed on Friday, strengthening the case for further policy easing from the European Central Bank.

It will cut its deposit rate twice more this year, in September and December, according to more than 80% of economists in an August Reuters poll, with fewer reductions than markets currently expect.

The downturn in German manufacturing accelerated, and in France, activity contracted at the fastest pace since January. But in Britain, factories had their strongest month in more than two years as domestic demand offset a fall in exports, adding to signs of momentum in the economy.

This poses a favorable backdrop for the new government of Prime Minister Keir Starmer, who is seeking to speed up growth.

Asian Chip Manufacturers Possess Mixed Outlook

Asian chip makers benefited from firm demand, but economic headwinds pose a risk to the region. China’s Caixin/S&P Global manufacturing PMI rose to 50.4 in August from 49.8 in July, beating analysts’ forecasts.

This reading, covering mostly smaller, export-oriented firms, shows a more optimistic view than an official PMI survey, which indicated an ongoing decline in manufacturing activity. “The PMIs for August suggest economic momentum held broadly steady last month, with modest improvements in manufacturing and services helping to offset a further slowdown in construction activity,” said Gabriel Ng, assistant economist at Capital Economics.

“But with factory gate price declines accelerating, the economy clearly remains at risk of slipping back into deflation,” Ng added.

Factory activity in South Korea and Taiwan also expanded in August, while Japan saw a slower rate of contraction due in part to solid global demand for semiconductors. Japanese manufacturers also gained from a rebound in car output after a safety scandal led to temporary production suspensions.

However, manufacturing activity contracted in Malaysia and Indonesia, surveys showed, underlying the pain some of the region’s economies are facing from China’s prolonged slowdown.

“Chip-producing countries are doing fairly well, but China’s slowdown will continue to drag on Asia’s manufacturing activity for quite some time,” stated Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute. “Slowing U.S. demand could add to the pain for Asian economies, many of which are already wary of the fallout from sluggish Chinese growth,” he concluded.

Japan’s final au Jibun Bank Japan manufacturing PMI rose to 49.8 in August, remaining in contraction territory for a second month but less sharply than in July. South Korea’s PMI stood at 51.9, up from 51.4 in July, bolstered by strong customer confidence and new domestic orders. Malaysia’s PMI held at 49.7 while Indonesia’s fell to 48.9.

India’s manufacturing activity growth eased to a three-month low as demand softened significantly, casting another shadow over the otherwise robust economic outlook.