Slowing Growth in Global Manufacturing Signals End to Economic Recovery

Global manufacturing continued to slow in August, with Europe and parts of Asia actually reporting contraction for the first time in years. In the U.S. (NYSE:SPY), though manufacturing continued to expand, its rate of expansion slowed in August, with the Purchasing Managers Index coming in at just 50.6 percent. Anything below 50 is considered a contraction.

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Europe’s manufacturing industry did contract in August, after having slowed to 50.4 in July, only 0.2 points below the current U.S. PMI reading. Europe’s manufacturing gauge, which surveys purchasing managers in the 17-nation euro zone, fell to 49 in August, it’s weakest in two years. As with the U.S., a reading below 50 indicates contraction.

With European governments cutting spending in order to narrow their budget deficits, consumers are less willing to spend, especially because some of those cuts have resulted in lost jobs or decreases in pay, especially in Greece. Even the U.K. (NYSE:EWU) has been cutting government spending, and while it is not included in Europe’s PMI, manufacturing in the U.K. also contracted in August.

“The euro zone is clearly struggling in the face of tighter fiscal policy across the region,” said Howard Archer, chief economist at IHS Global Insight in London. “Slower global growth has clearly hit foreign demand for goods and services pretty hard.” While the manufacturing sector contracted, the economy just barely stayed afloat, with growth slowing to 0.2% in the second quarter, down from 0.8% in the first.

Economic growth came to a near standstill in Germany (NYSE:EWG), Europe’s largest economy and the first to bounce back from the recession, while manufacturing growth slowed more than forecast, with Germany’s PMI dropping to 50.9. Meanwhile, output contracted in France (NYSE:EWQ) and Italy (NYSE:EWI), the region’s second- and third-largest economies, for the first time since June 2009 and September 2009, respectively. New orders also declined in August, at the fastest pace in over two years, with new export orders dropping for the second month. Germany reported the biggest decline in the euro zone, while selling prices declined in Spain, Ireland, and Greece.

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Manufacturing in South Korea (NYSE:EWY) and Taiwan (NYSE:EWT) contracted in August, while Chinese export orders fell for the first time in two years. However, while slowing growth may be bad news in the U.S. and Europe, it might dissipate Asian inflation pressures, as economies in the region, particularly that of China, have been rapidly expanding while Western economies have been stagnating.

China’s (NYSE:FXI) PMI registered at 50.9 for August, a 29-month low and just 0.3 percentage points above that of the U.S., according to the China Federation of Logistics and Purchasing. South Korea’s manufacturing gauge fell to 49.7 while Taiwan’s fell to 45.2, both showing contraction in the sector. “Slowing growth will ease some of the demand-side pressures across Asia” on consumer prices, said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “Our sense is that central banks in Asia are basically done with their monetary policy tightening,” though Taiwan and India, among others, may still raise their interest rates.

Inflation has been a problem from China to India, reaching a 3-year high in South Korea last month, and has lowered consumers’ purchasing power across the region. But any sign that consumer prices are beginning to moderate might let some central banks consider an easing in policy, as was the case with Brazil (NYSE:EWZ), which cut interest rates Wednesday. And according to Tim Condon, head of Asia research at ING Groep NV in Singapore (NYSE:EWS), “[Asia has] seen the worst and inflation will slowly subside.”

China’s PMI, a survey of over 820 companies in 20 different industries, showed the weakest export-orders reading since March 2009, with global liquidity, labor costs, and resource pricing reforms contributing to price pressures. Industrial production in South Korea fell 0.4% in July from the previous month, according to a government report yesterday, while Japan (NYSE:EWJ) saw output rise 0.6% as the region’s second-largest economy continued to recover from huge supply disruptions resulting from the March earthquake, though at a slower rate than the 1.4% advance expected.

With growth in many Asian economies slowing, central banks may be able to ease their inflation-reduction policies and keep borrowing costs where they are. However, two countries — India (NYSE:IFN) and Thailand — may still have to boost borrowing costs in order to tame inflation, which accelerated in Thailand last month to a 4.29% year-over-year rate, its highest since 2008, while India’s benchmark wholesale-price inflation rate has stayed above 9% since December.

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