Global factories lose steam, raise recession fears

SINGAPORE/LONDON - Global factory activity slowed down in October on weak demand for exports, raising the risk that Europe's debt crisis could drag the global economy into a new recession. Factory activity in Asia's big export economies slowed to its weakest rate in nearly three years in October, while in the United States, manufacturing expanded less than expected. A sharp decline in UK manufacturing provided the latest sign that Europe is on the brink of recession. "Interestingly, what the PMIs show is that the world economy was already weakening before the euro zone crisis was coming to a head," said Julian Jessop, chief global economist at Capital Economics in London. "I think the best we can hope for is a prolonged period of sluggish growth, but there has to be a significant risk that a further escalation of the financial crisis in Europe tips the world back into recession." China's official PMI unexpectedly fell to its lowest since February 2009, a survey showed Tuesday, reflecting a drop in new export orders -- particularly from the European Union, China's biggest export market. The US Institute for Supply Management's index of factory activity dipped to 50.8 from 51.6 in September, confounding economists' expectations for a pick-up. Purchasing managers' indexes for October also showed inflation pressures abating in Asia, which could bring the region's policymakers one step closer to lowering interest rates should the economic outlook deteriorate. Australia's central bank cut rates Tuesday for the first time since early 2009, when global financial markets were in turmoil, citing easing inflation and concerns about the world economic outlook. European leaders have struggled to convince markets that a deal reached last week to write down Greece's debt and boost a rescue fund would resolve the region's debt woes. Those measures were thrown into disarray on Monday by a shock decision by Greek Prime Minister George Papandreou to call a referendum on the bailout. That hammered European stock markets and drew ire from Germany. Manufacturing in the UK, the European Union's No. 3 economy, declined at its fastest pace in two years in October, according to the CIPS/Markit factory PMI. It slumped to 47.4 from 50.8, below even the most pessimistic forecast provided by economists. That overshadowed news that the UK economy grew by 0.5 percent in July-September, more than the 0.3 percent economists expected. "The parlous state of the domestic economy is clearly taking its toll on the manufacturing sector," said Ross Walker, UK economist at RBS, who called the PMI figures "dreadful." In Canada, growth in manufacturing activity slowed for the first time in four months in October on weak export orders. The RBC Canadian Manufacturing Purchasing Managers' Index slipped to 53.66 from 55.05 in September. Final PMIs due Wednesday from the euro zone are expected to confirm its manufacturing sector contracted for a third straight month. A recent Reuters survey showed economists evenly split on whether the euro zone would slide back into recession. Asia slowdown South Korea's PMI remained below 50 for a third consecutive month, its longest losing streak since the 2008-2009 global financial crisis. Export figures, also released Tuesday, showed Korean shipments to the European Union dropped 20 percent from a year earlier for the Oct. 1-20 period. Exports to the United States dropped a relatively modest 7 percent. "Korea's exports had been resilient all year despite weakness elsewhere, notably in Taiwan," said INGeconomist Tim Condon. "Today's data is the first sign of a crack." Taiwan's PMI dropped to 43.7 in October, a 33-month low. One in three respondents said new export orders fell, particularly from Europe and China. India bucked the regional trend, with a slight pickup. India's economy is far less reliant on exports for growth, which helps to insulate it from the global slowdown. The new orders index rose, breaking a six-month streak of declines, although export orders contracted again. Input prices eased across the region, according to the PMI surveys, a welcome respite for policymakers who have been reluctant to ease credit conditions while inflation remains high. In China, the input price sub-index tumbled to 46.2 in October from 56.6 a month earlier, dipping below 50 for the first time since April 2009. This provides further support to the view that Beijing's year-long tightening cycle is probably over. Still, economists see little chance of a rate cut before 2012. Instead, China will probably stick with targeted measures to ease lending conditions to small- and medium-sized businesses, where borrowing has been constrained. — Reuters