Slowdown worsens as China cools, Europe sinks

Some of the world’s major economies are faltering or shrinking, with Chinese factory output barely growing and powerful European manufacturing countries falling deeper into malaise, surveys showed on Friday.

In Britain, manufacturing activity shrank at its fastest pace in three years last month as the global economic slowdown hit demand for its goods.

“It doesn’t bode well for the second quarter,” said Sian Fenner, global macroeconomist at Lloyds Banking Group.

“There is a lot of heightened uncertainty and risk in the market in the euro area, and this is playing on manufacturers’ minds.

“It could start feeding through to sentiment in the United States, although at the moment the United States is holding up reasonably well, and there are worrying signs from China.”

Signs of a faltering recovery in the United States have fed investor fears. The critical US non-farm payrolls report follows data that showed private employers created fewer jobs than expected last month.

Equities, the euro, sterling and growth-linked currencies all fell. Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) dropped to 45.1 in May from 45.9 in April, slightly above a preliminary reading but marking its lowest level since June 2009.

It has been below the 50 mark that divides growth from contraction for 10 months. Similarly the output index fell to 44.6 from April’s 46.1, also the lowest since June 2009.

Earlier data from France and Germany, Europe’s largest economy, showed their manufacturing sectors contracted at the fastest pace in nearly three years.

It was only German strength that prevented the euro zone falling into recession in the first quarter. Italy’s factories contracted for the tenth straight month while in Spain the PMI fell below that of Greece’s, and posted the lowest reading of all the countries surveyed.

The news in Britain, linked inexorably to the fortunes of the euro zone, was little better. The UK economy is mired in its second recession in two years and its PMI plunged to 45.9 last month, its lowest reading since May 2009 and the second-steepest fall in the survey’s 20-year history. Analysts had expected a more modest dip to 49.8.

The euro zone’s economic deterioration prompted more than a third of economists polled by Reuters this week to say the ECB will cut interest rates from their record 1.0 percent low before the end of the year to boost growth. “Fundamentals certainly justify a rate cut any time soon.

However, the ECB might keep some powder dry at next week’s meeting and wait for the outcome of the Greek elections - and future of the monetary union - to change its policy stance,” said Annalisa Piazza at Newedge.

Greece, which unleashed the financial maelstrom that has ravaged the bloc, is due for a crucial second election in three weeks that may determine whether it remains a member of the currency union.

Recent Reuters polls of fund managers, economists, and money market traders have all suggested that battered Greece will still be a member of the 17-nation bloc come 2014.

Declines in two gauges of China’s manufacturing sector were particularly worrying for investors looking to the world’s second biggest economy - the main engine of global growth in recent years - to pick up the slack created by Europe’s debt crisis and the sluggish US economy.

China’s annual economic growth is expected by analysts to fall to 7.9 per cent in the second quarter.