Manufacturing Slump Deepens From Euro Area to China: Economy

Euro-area manufacturing output shrank at the fastest pace in three years in June and a Chinese output gauge indicated contraction as Europe’s worsening fiscal crisis clouded global economic-growth prospects.

A gauge of euro-region manufacturing fell to 44.8 from 45.1 in May, London-based Markit Economics said today in an initial estimate. That’s the lowest in 36 months. The preliminary reading was 48.1 for a Chinese purchasing managers’ index from HSBC Holdings Plc and Markit. A reading below 50 indicates contraction.
The euro area’s turmoil is undermining global growth by eroding confidence of investors and consumers as companies step up job cuts. Manufacturing in the U.S. probably expanded at a weaker pace in June, a Bloomberg News survey shows. While Greece’s Antonis Samaras was sworn in as prime minister with a coalition that will seek relief from austerity measures, Group of 20 leaders this week pushed Europe to step up measures that might contain the crisis.

“No significant recovery can be expected as long as the future of the euro zone remains in doubt,” said Peter Vanden Houte, an economist at ING Group in Brussels. “If anything, today’s figure can serve as a wake-up call for European leaders that decisive action is badly needed.”

The euro has declined 4 percent against the dollar over the past two months as the worsening debt turmoil forced Spain to seek external aid for its banks. The single currency traded at $1.2679 at 11:47 a.m. in Brussels, down 0.2 percent on the day.
Below-50 Readings

A euro-area composite index based on a survey of purchasing managers in both the services and manufacturing industries held at 46, the same reading as in May, Markit said today. Economists had forecast a drop to 45.5, the median of 15 estimates in a Bloomberg News survey showed. The services gauge rose to 46.8 from 46.7.

In China, if confirmed on July 2, the gauge would be at the lowest since November 2011 and equal the run of below-50 readings from August 2008 to March 2009.

Euro-region finance ministers are meeting in Luxembourg today to discuss the latest developments in the debt crisis. Spain may seek aid of as much as 100 billion euros ($127 billion) for its banking industry, making it the fourth euro- area nation to ask for a bailout.
‘Heightened Problems’

In Greece, Samaras is set to announce the members of his government today after securing agreement from the country’s political leaders on a coalition that will seek relief from austerity measures tied to international loans.

With governments across Europe stepping up spending cuts to plug budget gaps, the economic slump may deepen. European economic confidence dropped for a second month in May and unemployment held at 11 percent in April, a record high. German investor sentiment fell the most in 14 years in June, suggesting Europe’s largest economy is faltering.

The euro area “is having to cope with a serious tightening of fiscal policy in many countries, markedly rising unemployment, squeezed consumer purchasing power, tight credit conditions and muted global growth that is limiting export orders,” said Howard Archer, chief European economist at IHS Global Insight in London. “The heightened problems in Greece and Spain are magnifying the problems by weighing on already weak and fragile business and consumer confidence.”
Job Cuts

A gauge of German manufacturing output dropped to 44.7 in June from 45.2 in the previous month, Markit said today. The French indicator rose to 45.3 from 44.7.

“With the exception of a marginal increase in January, the survey has recorded continual contraction since last September, with the rate of decline having gathered significant momentum in the second quarter,” Markit said about the euro-area composite index. “The second quarter has seen the steepest downturn for three years.”

Danone SA (BN), the world’s biggest yogurt maker, earlier this week cut its profitability forecast and said it faced “a swift deterioration in consumption in southern Europe that has proven steeper than anticipated, especially in Spain.” Fiat Spa (F), Italy’s largest manufacturer, said on June 14 that it plans to cut investment in Europe by 500 million euros ($635 million).

A recovery in Europe “depends on many factors,” Fiat Chief Executive Officer Sergio Marchionne said on June 14. “First Greece, then the way in which the euro currency will continue and what Europe will do to sustain growth.”
‘Darker Outlook’

Euro-region gross domestic product probably dropped 0.6 percent in the second quarter, according to Chris Williamson, chief economist at Markit. In the year’s first three months, the area’s economy stalled.

“The downturn is gathering pace and spreading across the region, with Germany on course for a marginal fall in GDP in the second quarter, though far steeper declines are likely elsewhere,” Williamson wrote in the statement. “Firms are preparing for conditions to worsen in the coming months, with the darker outlook often attributed to uncertainty caused by the region’s ongoing economic and political crises.”

China’s data today added to concerns that growth in Asia is in danger as the world grapples with the continuing debt crisis in Europe. Japan yesterday reported its first trade deficit with the EU since the Finance Ministry began tracking data in 1979. Bank of Japan Governor Masaaki Shirakawa said that Europe poses the biggest risk as his nation’s economy returns to the path of “moderate recovery.”
ECB Stance

The U.S. Federal Reserve said late yesterday it will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year in a bid to reduce unemployment and protect the world’s largest economy.

An index based on a survey of purchasing managers at factories probably fell to 54.4 in June from 54 in the previous month, according to a Bloomberg survey. Markit will release the preliminary report at 2:58 p.m. Brussels time today.

In the U.K., Bank of England Governor Mervyn King and three other policy makers were overruled in a push to expand the bank’s bond-purchase program as a majority said more stimulus was likely to be needed as risks from the euro crisis mounted. European Central Bank President Mario Draghi said on June 6 that policy makers discussed cutting borrowing costs to a new record low as risks to the economic outlook increased.

The ECB has “got plenty of bullets they can fire still,” Jim O’Neill, chairman of Goldman Sachs Asset Management, told Bloomberg Television in an interview in London on June 19. “I suspect they’re hoping to get the summit out of the way at the end of the month. It’s kind of like ‘guys, show us your vision, we play our role.’”