Factories Offer Mixed Omens for Global Growth as Year Begins

(Bloomberg) -- Stabilization of the global economy remained mixed at the start of 2019, with countries across Asia and Europe reporting further weakness in manufacturing as American factories showed signs of improvement.

Purchasing manager indexes from China to Australia, South Korea, the U.K., Italy and Germany all declined in January. The Chinese number dropped to 48.3 from 49.7, moving further below the key 50 level that signifies expansion to its worst reading since 2016. The Institute for Supply Management’s index for U.S. factories unexpectedly rose to 56.6, rebounding after the steepest drop in a decade, data showed Friday.

Factories Offer Mixed Omens for Global Growth as Year Begins

While the U.S. measure points to improvement, many other places are experiencing declines or, as in the case of Brazil, only modest gains. IHS Markit, which compiles the PMI gauges, also found further reasons for worry below the surface of the numbers, such as a sixth straight drop in South Korea export orders and a rough month in Japan for sales of goods relating to semiconductors.

“Given South Korea’s close trading ties with China and the U.S., falling export demand acts as a worrying indicator for global economic growth,” said Joe Hayes, an economist at IHS Markit.

It’s a shaky time for world commerce, with companies waiting to hear if the U.S. and China can find a resolution to their trade dispute and prevent an escalation of the tit-for-tat tariff battle of 2018. The International Monetary Fund cited trade as a major risk when it downgraded its forecast for the world economy in January.

What Our Economists Say...

For China, and the world, this latest sign of fading growth comes at a challenging moment. Bloomberg Economics’ view is that the world economy faces slower growth, not no growth.
--David Qu, Chang Shu and Tom Orlik, Bloomberg Economics

On Friday, household appliance maker Electrolux AB said conditions are “challenging” and that “visibility is impacted by increased uncertainties in the world.” Frans Van Houten, chief executive officer at Royal Philips NV, said the trade dispute is an additional hassle for companies as they try to avoid potential tariffs on imports.

“It’s all extra work to deal with this upheaval,” he said in a Bloomberg Television interview. “We are making progress to rearrange supply chains.”

The Federal Reserve responded to the shift in the global outlook by pausing its interest-rate hike cycle. China’s economy is also slowing and a flood of companies from the world’s second biggest economy have warned about profits. There’s been a concerted stimulus effort by both the government and the central bank, although the effect has yet to be seen in business activity.

“Infrastructure spending looks like it’s picking up already -- but in the broader Chinese economy, it’s going to take a bit of time, probably into the second quarter,” David Page, a senior economist at AXA Investment Managers, said. “It might take some time therefore to spill over into Europe.”

According to Berenberg Bank, the downtrend is “entrenched” and it could take a lot to turn things around, including “positive news on trade issues, China, the Fed and Brexit.”

“We expect the global economy to regain some momentum later this year,” said Chief Economist Holger Schmieding. “Unfortunately, the situation still looks set to get worse first.”

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