Faltering Global Factories Add to 2019 Challenges for Central Banks

(Bloomberg) -- Manufacturing gauges across the world’s largest economies stumbled at the end of last year, starting 2019 with fresh challenges for global growth and central banks.

The global manufacturing index from JPMorgan Chase & Co. and IHS Markit fell in December to the lowest level since September 2016 as measures of orders and hiring weakened, data showed Wednesday. That followed other IHS Markit reports showing factory conditions slumped across Asia’s most export-oriented economies, with China’s signaling contraction for the first time since mid-2017 as Taiwan, Malaysia and South Korea also point to declines. Factory growth in the euro area fell to the lowest in almost three years.

In the U.S., evidence is mounting that President Donald Trump’s trade war is becoming a greater headwind for producers. Five Federal Reserve indexes of regional manufacturing all slumped in December, the first time they’ve fallen in unison since May 2016. Another gauge of American manufacturing, due Thursday, is projected to fall to an eight-month low.

The growing pile of weaker data may increase pressure on the Fed to signal an immediate pause in its quarterly pace of interest-rate increases. Officials have already said they intend to slow down the pace of hikes this year. As policy makers raised rates in December for the fourth time in 2018, they penciled in just two moves for 2019, according to the median projection of Fed governors and district-bank presidents.

Faltering Global Factories Add to 2019 Challenges for Central Banks

That’s still more than many investors anticipate, with interest-rate futures pointing to no moves in 2019 and a potential rate cut next year. Amid those expectations, financial markets reacted badly to the December hike and the lack of a stronger signal on when the Fed would pause. The S&P 500 stock index in December had its worst month since February 2009.

Trade tensions between the U.S. and China are hurting demand across Asia’s manufacturing hubs and export-oriented European economies including Germany. The International Monetary Fund in October cut its 2018 and 2019 global growth projections, citing trade uncertainty.

China’s central bank said Wednesday it will adjust the calculation of some banks’ reserve ratios, a move aimed at boosting the impact of a previous easing step as the economy slows. Growth in world’s second-largest economy is forecast to decelerate to 6.6 percent in 2018, the weakest pace in almost three decades, and continue slowing this year and next.

Meanwhile, economists project slower U.S. expansion and job growth this year as fiscal stimulus that took effect in early 2018 begins to fade. What’s more, a government shutdown has postponed the release of some U.S. indicators, including those for international trade, adding frustration for economists and investors seeking guidance from fresh data.

Bloomberg’s Global Trade Checkup is softening after an earlier rush to front-load export orders ahead of threatened tariffs. While Trump has signaled negotiations with China are making progress, economists remain wary that talks could stall ahead of a March 1 deadline. U.S. officials are withholding judgment on China’s efforts to ease trade tensions at talks next week, raising the prospect that Beijing’s reforms won’t satisfy Trump’s demands.

European Central Bank President Mario Draghi identified protectionism as a key risk for the euro area in 2019 along with vulnerabilities in emerging economies and market volatility. European growth slowed dramatically in the second half of 2018 with no sign of a year-end pickup. IHS Markit’s euro-area manufacturing gauge fell in December amid contractions in France and Italy -- the biggest economies after Germany. In Italy, manufacturing contracted for a third month in December, suggesting the nation may see another recession after the economy unexpectedly shrank in the third quarter.

Euro-zone exporters are pulling back amid global protectionism concerns, which have added to domestic problems in the auto and banking industries. Brexit is also casting a shadow, with British companies putting off investment and now stockpiling as the odds rise that the country will leave the European Union without a transition agreement.

The clouded outlook has prompted investors to bet that the ECB and Bank of England might be unable to raise interest rates at all in 2019. The ECB has halted quantitative easing but pledged to keep rates at record lows until at least after the summer, and the BOE has warned of a potential economic meltdown in a no-deal Brexit.

On Friday, the U.S. jobs report is projected to show 180,000 net hires in December, the lowest median projection ahead of the report in almost a year. That same day, Fed Chairman Jerome Powell is scheduled to make his first public remarks of 2019 in Atlanta. Investors will be listening closely for any hint that a March increase is unlikely.

©2019 Bloomberg L.P.