World factories gearing down but raising prices

Factories across the developed world and emerging markets are rapidly gearing down production, responding to fading demand, but are raising prices aggressively, spelling more trouble for the world's central banks.

Reports from around the world - China, the eurozone, Germany, Britain, Sweden - pointed to a rapid slowdown, leaving financial markets jittery awaiting expected news due later of another month of job losses in the United States.

They marked the second day of almost uniformly negative economic news from across the globe - a worrying sign of a simultaneous downturn nearly one year after the start of a credit crunch that still has world markets in its clutches.

Even China, which is about to host the world at the Olympic Games and which has been booming for years, saw its growth rate dip sharply in the first half of this year and manufacturing activity stumble.

President Hu Jintao said sustaining strong growth is now an economic priority - along with containing price rises which until now has been the Chinese authorities' central concern through years of double-digit economic growth.

And in Europe, where some of its most fragile economies like Italy and Spain are flirting with recession, surveys of manufacturing companies suggested that tougher times lay ahead.

"There is a broad-based slowdown in manufacturing activity across the eurozone with a disastrous number in Spain," said Juergen Michels, economist at Citi in London, adding: "There is a risk that the eurozone could fall into recession".

US non-farm payrolls were set to fall by 75,000 in July according to a Reuters poll, following a drop of 64,000 in June. The Institute for Supply Management's US factory PMI, due at 1400 GMT, is set to slip to 49.3 in July from 50.2 in June.

Major central banks this week extended programmes to inject cash into money markets but the European Central Bank and the Bank of England, as well as the US Federal Reserve, are not expected to shift interest rate policy any time soon.

The Chinese authorities, which many times last year hiked interest rates to slow an overheating economy, on Friday raised banks' lending quotas by five per cent in a move to prop it up.

Already struggling with the early stages of a property market bust, rapidly slowing growth and soaring inflation, British policymakers were dealt perhaps the worst possible combination of data from the manufacturing sector on Friday.

Activity contracted at its fastest pace in more than a decade while factories ramped up the prices they charge for their goods at the fastest pace since the CIPS/Markit monthly survey began recording them during the boom times of late 1999.

"Recession, here we come!" quipped Alan Clarke, UK economist at BNP Paribas.

A poll of 76 economists by Reuters showed the Bank of England set to leave interest rates steady this week and for the remainder of the year as it is trapped between slowing growth and inflation set to soar even higher on gas bill rises.

Even in Germany, where its traditionally strong export sector has proved surprisingly resilient in the face of a record high currency, domestic demand appears to be falling away and will not be able to prop up growth if exports flounder. German June retail sales fell a sharp 2.8 per cent on the month according to Bundesbank figures. Even separate data showing sales excluding vehicles and turnover at gas stations fell by 1.4 per cent, nearly three times the 0.5 per cent fall expected by economists.

In Scandinavia, the Swedish economy did not grow at all in the second quarter, confounding forecasts for a modest 0.3 per cent expansion and throwing two more expected interest rate hikes from the Riksbank into question.

The Swedish manufacturing PMI also registered contraction for the first time since 2003.

In Denmark, which has already dipped into recession, recording two straight quarters of contraction, figures showed retail sales collapsed 6.3 per cent on a year ago in June and its manufacturing PMI for July crumbled.