Chinese manufacturing fall adds to evidence of sharp global downturn

Great Wall Of China Graffiti

China’s factories have stumbled through last month’s new year celebrations to join a broad decline in manufacturing across Europe and the US, adding further evidence of sharp downturn in the global economy since the beginning of the year.

Factory output contracted in China and the UK during February while growth slowed in France, Germany, Italy and the US to indicate that businesses and consumers remain wary of committing themselves to large orders while the direction of global trade remains uncertain.

UK manufacturers, which cut jobs for the second month in a row, were among the worst hit following a tumble in monthly exports.

In China, however, longstanding issues of oversupply, sky-high pollution levels and recent falls in demand could lead to a dramatic jobs cull. According to Reuters, the Chinese state plans to reduce the number of state workers in the country’s bloated industrial sectors by up to 6 million.

Starting with coal and steel, this will be done over the next two to three years. To limit the fallout, it is understood that the authorities will spend nearly 150bn yuan (£16.4bn) to cover layoffs in just in these two sectors.

With central banks preparing to spend billions to prevent deflation and a recession, markets remained calm. The FTSE pushed ahead 55 points to 6,152 on Tuesday, while the German Dax jumped more than 2%, or 221 points, to 9,717.

The FTSE 100 is now back to its levels of the beginning of January, regaining almost all the ground lost in the record bad start to the year.

US markets also shrugged off the stagnation of the nation’s manufacturing sector, with the Dow Jones index of top companies up 273 points to 16,790.

Investors believe the European Central Bank is poised to stretch its balance sheet further to bolster the eurozone economy after the disappointing manufacturing figures and inflation data. Headline inflation across the single currency zone dropped to -0.2% in February, down from 0.3% in the previous month.

The Bank of Japan has already increased its stimulus package and the US Federal Reserve could reveal that a possible interest rate rise later this month will be put off until a recovery is well established and output begins to rise strongly.

China’s manufacturing output declined for a fifth month to push the Caixin reading down to a five-month low of 48.0, versus 48.4 in January. The official manufacturing purchasing managers’ index (PMI) came in at 49.0, below Reuters’ average forecast of 49.3 and January’s reading of 49.4. A figure below 50 indicates contraction.

“Companies that reported lower output generally cited weak market conditions and reduced intakes of new work. Furthermore, total new business declined for the eighth month in a row, albeit at a modest pace that was similar to January,” said the Caixin financial media group, which publishes the general China manufacturing PMI survey with financial information service provider Markit.

Analysts expressed concern about the continued decline in total new business and about the number of goods on factory warehouse shelves decreasing at the fastest pace since September 2011.

In another sign that manufacturers are braced for a long period of chasing business from a diminishing number of customers, they continued to lower their prices in February.

Bill Adams, senior international economist at PNC Financial Services Group, said the global economy would avoid recession, though only after the timely intervention of central banks.

“Monetary policy is highly accommodative around the world, and very low oil prices are supporting consumer demand. Nevertheless, the decline in China’s headline business sentiment indicators in February, and the parallel declines in flash PMI releases for other major economies, suggest that increased vigilance toward global growth risks may be appropriate in the near term,” he said.

Moody’s gave added weight to forecasts of a long wait before an upturn with a prediction for 2016.

Sharon Ou, a senior credit officer at the ratings agency, said a sharp increase in the number of businesses defaulting on their loans and a rash of profit warnings, which are often the first sign of businesses getting into trouble, have heightened concerns that this year would be the worst for corporate collapses since the 2008 crash.

“Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016,” she said.

“The prospect of further interest rate hikes by the Federal Reserve could also lead investors to become even more risk-averse.”

The default rate for all corporate bond issuers rated by Moody’s is expected to rise to 2.1% in 2016, a 30% increase on last year.

The prospect of a sharp increase in defaults could be seen as the first step in governments allowing so-called “zombie companies” going to the wall.

But investors are unlikely to welcome a rise in bankruptcies and become more reluctant to deploy their funds for investment, leaving a bigger gap for central banks to fill.

Powered by article was written by Phillip Inman Economics correspondent, for The Guardian on Tuesday 1st March 2016 20.05 Europe/London © Guardian News and Media Limited 2010


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