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Prospects daily: Manufacturing measures point to slower growth in Asia, Europe and the U.S.

Global Macroeconomics Team's picture

Important developments today:

1.  ECB’s €111 billion allotment eases interbank market tensions

2.  U.S. initial unemployment claims increase in latest week

3.  Manufacturing activity slows in Europe and the U.S.



ECB’s €111 billion allotment eases interbank market tensions. The European Central Bank said Thursday it is lending €111.2 billion for six days to soothe commercial bank uncertainties at the expiration of the Bank’s 12-month €442 billion loan.

Seventy-eight banks subscribed to the six-day fund at a fixed interest rate of 1 percent. This was considered a modest success, effectively cutting €199 billion from the Euro-Zone’s liquidity surplus—meaning banks are better able to borrow from each other than directly from the central bank. The ECB also lent firms €131.9 billion in three-month loans on Wednesday, much less than what market analysts’ has estimated (€200 billion), but serving to lift bank equities across the region. The results from the ECB financing operations this week suggest that European banks’ liquidity problems are easing, despite lingering concerns about the impact of the sovereign debt crisis in the region.

The euro inched higher again after the outcome. At the same time, Spain raised €3.5 billion in an oversubscribed
government bond sale. The euro is currently trading higher vis-à-vis the dollar and investor worries over the possibility of another crunch in the interbank market seem to be fading. Overnight money market rates, which the ECB regards as a main transmission channel for its policy rate, fell back to between 0.40% and 0.45%, after jumping as high as 0.70% before the ECB operations.


Source: Labor Department


U.S. initial unemployment claims increase in latest week. First-time claims for unemployment insurance increased by 13,000 in the week ending June 26 to a seasonally adjusted total of 472,000 persons. Layoffs have been sustained at a high level despite net job growth in the past three months. This suggests that companies are paring payrolls despite overall economic growth this year. The Labor Department’s employment report for June will be released tomorrow (Friday, July 2), and is likely to show weaker job gains for the month, reflecting a drop in temporary employment for workers hired by U.S. Census, which has underpinned payroll numbers since March.


U.S. manufacturing grows at slower pace in June The manufacturing sector in the United States grew for an 11th consecutive month in June, according to the Institute of Supply Management’s (ISM) index of manufacturing activity, which was reported at 56.2 today. While any reading above 50 separates contraction from expansion, the ISM gauge for manufacturing has now slowed for two consecutive months, from 60.4 in April and 59.7 in May, indicating that spillovers from the Euro Area debt crisis may be having an impact on demand for U.S. manufactured goods. Indeed, the measure for new orders dropped from 65.7 to 58.5 in the latest month, signaling that business appears to be reducing the pace of restocking in view of slower growth in Europe and China.


European manufacturing measures also point to slowing growth. As in the United States, China and Japan (see below), surveys of European purchasing managers in manufacturing underscored moderate deterioration in performance across a number of countries in the Euro Area during June—making this development a global phenomenon. In the European context, both households and business continue to refrain from spending- given the over-arching effects of the public-sector fiscal crisis, slow employment growth, a fading of government stimulus measures- and despite a pickup in exports due to the weakened euro. The headline PMI index, produced by Markit Economics, moved down marginally in the month to 55.6 from 55.8 in May; but this represented the weakest pace of growth in some 4 months. Production of capital and intermediate goods remains a strongpoint, but consumer goods are down, due to the factors noted above.


Tankan survey shows improved Japanese business sentiment. Despite a multiplicity of indicators suggesting a softening of Japanese growth ahead, executives of large Japanese manufacturing firms have not “felt this good” in a full 2 years. The Tankan survey for the second quarter of 2010 improved for a fifth quarter running, with the key index standing at a reading of “1” – contrasted with last quarter when the dispersion index was floundering at “minus 14”. Interpretations abound. “The improvement in confidence suggests that the recent turmoil in financial markets has not affected the real economy much”, notes Masamichi Adachi of JPMorgan, Tokyo. But Susumu Kato of Credit Agricole, Tokyo adds: “We can’t expect further stimulus globally, hence it is looking shaky whether the Japanese expansion will be extended to 18 to 24 months”.


Among emerging markets:

In East Asia and the Pacific, China’s manufacturing output growth is showing signs of slowing, as indicated by a softening in the Federation of Logistics and Purchasing PMI index, which retreated to a reading of 52.1 in June from 53.9 in May. The slowdown is also confirmed by the HSBC Holdings Plc manufacturing index which slid to a 14-month low in the month.

In South Asia, India’s manufacturing growth also eased in June, as signaled by a falloff in the HSBC Holdings Plc and Markit-Economics PMI, which declined to 57.3 from 59 in May. Meanwhile inflation is expected to accelerate by as much as a full percentage point after the government allowed state refineries to raise gasoline prices, in a bid to bring down the budget deficit from a 16-year high.

In Latin America and the Caribbean, Brazil’s industrial production expanded 14.8% year-on-year in May, marking the least dynamic showing since November- and a significant slowdown in the pace of growth, though output gains still remain well above potential.

In Central and Eastern Europe, Poland’s June PMI increased to 53.3, the highest reading since August 2007, up from 52.2 in May, driven largely by improvements in new orders, according to HSBC Holdings Plc.

In Sub-Saharan Africa, Nigeria’s central bank plans to clear about $10 billion of toxic assets from the banking system by the end of the year, with a cost of about $5 billion, according to Governor Lamido Sanusi. So far the central bank has pumped in 629 billion naira ($4.1 billion) to recapitalize commercial banks laden with toxic debt. South Africa’s PMI retreated to 48.4, falling below the 50 growth mark for the first time in eight months in June. Kenya’s consumer price inflation eased to 3.2% in June (y/y), a third decline in four months, and down from 3.9% in the previous month.



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