Factories across Asia and the eurozone reported a general loss of momentum last month that speaks volumes about the need for more policy stimulus on top of Japan’s latest efforts to ignite growth.
A second month of price-cutting in the eurozone, alongside only tepid expansion in Germany – the bloc’s growth engine – and contractions in France and Italy, will be disconcerting for the European Central Bank as it faces a real risk of deflation.
Meanwhile, regional manufacturing surveys from Asia were littered with unwelcome landmarks, including a five-month low for activity in China, a four-month trough for South Korea and a 14-month low for Indonesia.
Japan’s bold move in expanding its already massive asset-buying programme raised expectations the ECB will eventually have to bite the bullet on quantitative easing, but the move faces opposition from Germany.
Readings on Japanese activity were delayed by a holiday but will likely be overshadowed by the Bank of Japan’s decision last Friday that took financial markets by surprise.
The BOJ’s move stands in marked contrast with the Federal Reserve, which on Wednesday ended its own quantitative easing, judging that the US economy had recovered enough to dispense with the emergency flood of cash into its financial system.
Some form of quantitative easing – buying asset-backed securities, corporate bonds or sovereign debt – is one of the last policy options the ECB has left to fight deflation risks and rekindle growth in the monetary union.
Eurozone inflation was just 0.4 per cent in October, well within what the ECB terms a “danger zone” and the surveys showed that further discounts at the factory gate failed to drive up new orders.
Markit’s final October manufacturing Purchasing Managers’ Index was 50.6, beating September’s 50.3 but shy of an earlier flash estimate of 50.7. October marked the 16th month the index has been above the 50 line that divides growth from contraction.
An index measuring output, which feeds into a composite PMI due tomorrow that is seen as a good indicator of economic growth, rose to 51.5 from September’s 51.0, although that too was lower than the flash reading, which came in at 51.9.
November will probably not be much better as orders fell, backlogs were run down and stocks of finished goods built up.
It is hard to see any significant near-term boost to performance
“Perhaps most worrying is the trend in new orders, a key bellwether of future output growth,” said Rob Dobson, senior economist at Markit. “It is hard to see any significant near-term boost to performance.”
Germany’s manufacturing industry returned to modest growth last month but new business fell slightly for a second month as Russian sanctions and a general economic slowdown weighed on demand.
Adding to the gloom, the surveys showed French factory activity contracted faster than in September and Italian manufacturing slowed at the sharpest rate in 17 months.
The relative outperformance of the US economy should be evident in the ISM survey which was expected to hold at a healthy 56.2 while October’s payrolls report on Friday is forecast to show a solid increase.
British factories also reported a decent month of October. Activity expanded at the fastest rate in three months but weak demand from the eurozone, its main trading partner, sent export orders tumbling at the fastest pace since January 2013.
After the releases, the dollar powered to a seven-year peak against the yen and a two-year high against the euro although the data showing China’s economy is losing momentum tempered investors’ mood and weighed on global stocks.
HSBC’s version of the China PMI, compiled by Markit, was a whisker firmer at 50.4 in October, from September’s 50.2, but showed growth slowing in output and new orders, while companies trimmed staff levels for the 12th straight month.