Tuesday, December 2, 2008

China, EU and SA show record falls in manufacturing

By Simon Kennedy, Business Report, December 2, 2008

London - Manufacturing is shrinking around the world as the financial crisis enters its 17th month, providing fresh evidence that the global economy is in recession and intensifying pressure on policy makers to respond.

Industry contracted in the US last month at the fastest pace in 26 years, while factory indices in Europe, Russia, China and South Africa showed record shrinkages, according to reports released yesterday.

Signs that the worldwide slump is worsening pushed down stocks.

Manufacturers are suffering as the persistent lack of credit hammers demand, forcing them to cut output and jobs.

"The pace of manufacturing decline has been vicious," said Kevin Gaynor, the head of economic and interest rate strategy at Royal Bank of Scotland Group.

"If we thought the last quarter was bad for the global economy, the current quarter is shaping up to be a lot worse."

With the financial crisis that began in August last year now morphing into a worldwide economic downturn, economists at JPMorgan Chase estimate industrial production will decline in developed markets this quarter by the most since 1980.

The Institute for Supply Management's US factory index dropped to 36.2 points, the lowest since 1982, the group reported yesterday. A reading of 50 is the dividing line between expansion and contraction.

The index was projected to drop to 37, according to the median of 61 economists' forecasts in a Bloomberg survey.

That leaves economists forecasting one of the most severe US recessions in the postwar era, forcing the Federal Reserve to consider more interest rate cuts and president elect Barack Obama to mull over a stimulus programme.

Manufacturing in the 15 nations using the euro contracted by the most on record last month. A purchasing managers' index (PMI) dropped to 35.6 from 41.1 in October, remaining below the expansion threshold for a sixth month.

The figure is the lowest since Markit Economics began the poll in 1998, and below an initial estimate of 36.2 published on November 21.

With the euro zone economy in its first recession in 15 years, the malaise leaves the European Central Bank (ECB) facing calls to accelerate rate cuts this week. The bank has reduced its benchmark rate twice by 50 -basis points since early October.

Investors are betting a cut of as much as 75 basis points when its governing council convenes on Thursday.

"There is a compelling case for the ECB to slash interest rates by 100 basis points" for the first time, said Howard Archer, an economist at IHS Global Insight in London.

The slump in industrial economies is now infecting emerging markets, depriving the world of power it was relying on to cushion the slowdown.

Manufacturing in China, the fastest-growing major economy, fell by the most on record last month, according to the China Federation of Logistics and Purchasing. Its PMI fell to a seasonally adjusted 38.8 from 44.6 in October.

"Another grim month for China manufacturing," said Eric Fishwick, the head of economic research at CLSA Asia-Pacific Markets in Hong Kong.

"Export orders will weaken further, and we expect further cuts in production and employment."

In Russia, VTB Bank Europe said its measure of purchasing managers fell for a fourth month in November to 39.8, below the level in 1998.

Indices for Poland, Hungary, Sweden and the Czech Republic also showed some of their steepest declines as recession struck their main export markets.

South African manufacturing shrank at the fastest pace in at least nine years, pushing Investec Asset Management's PMI to 39.5 last month from 46.2 in October.