Slowdown worsens as EU sinks, US job growth stumbles

WASHINGTON/LONDON: The world’s economic outlook darkened on Friday as reports showed US employment growth slowing sharply, Chinese factory output barely growing and European manufacturing falling deeper into malaise. In a shock that sent global markets into a dive, the US economy added just 69,000 new jobs in May, less than half what analysts expected. Readings for the prior two months were also revised down, while the unemployment rate rose for the first time in almost a year, to 8.2 percent.

The Labor Department report dealt a blow to confidence in the US economic recovery, which until recently had contrasted with Europe’s deteriorating economic situation and seemingly intractable political crisis over government budget deficits.

“It certainly suggests that perhaps the softness in Europe is either influencing the US or that the US recovery may not be strong enough to overcome the softness in Europe,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
The jobs numbers were likely to create a political headache for President Barack Obama ahead of the presidential elections in November, and strengthen the case for another round of stimulus from the Federal Reserve.

In Britain, manufacturing activity shrank at its fastest pace in three years last month as the global economic slowdown hit demand for its goods.

Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) dropped to 45.1 in May from 45.9 in April, slightly above a preliminary reading but marking its lowest level since June 2009.

It has been below the 50 mark that divides growth from contraction for 10 months. Similarly, the output index fell to 44.6 from April’s 46.1, also the lowest since June 2009.

US manufacturing proved a bit more resilient, with the Institute for Supply Management’s index falling modestly in May but still at a respectable level of 53.5. New orders also rose to their highest level since April of 2011.

US stocks fell steeply, with the Dow Jones industrial average sinking 1.6 per cent.

CORE CONSTERNATION

Earlier data from France and Germany, Europe’s largest economy, showed their manufacturing sectors contracted at the fastest pace in nearly three years. It was only German strength that prevented the euro zone falling into recession in the first quarter.

Italy’s factories contracted for the tenth straight month while in Spain the PMI fell below that of Greece’s, and posted the lowest reading of all the countries surveyed.

The news in Britain, linked inexorably to the fortunes of the euro zone, was little better.

The UK economy is mired in its second recession in two years and its PMI plunged to 45.9 last month, its lowest reading since May 2009 and the second-steepest fall in the survey’s 20-year history. Analysts had expected a more modest dip to 49.8.

The euro zone’s economic deterioration prompted more than a third of economists polled by Reuters this week to say the ECB will cut interest rates from their record 1.0 percent low before the end of the year to boost growth.

“Fundamentals certainly justify a rate cut any time soon. However, the ECB might keep some powder dry at next week’s meeting and wait for the outcome of the Greek elections – and future of the monetary union – to change its policy stance,” said Annalisa Piazza at Newedge.

Greece, which unleashed the financial maelstrom that has ravaged the bloc, is due for a crucial second election on June 17 that may determine whether it remains a member of the currency union.

Recent Reuters polls of fund managers, economists, and money market traders have all suggested that the battered economy will still be a member of the 17-nation bloc come 2014.

CHINA STALLS

Declines in two gauges of China’s manufacturing sector were particularly worrying for investors looking to the world’s second biggest economy – the main engine of global growth in recent years – to pick up the slack created by Europe’s debt crisis and the sluggish U.S. economy.

China’s annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009. That could pile pressure on authorities to attempt further stimulus.

“What’s really worrying is new orders have started to shrink and inventories have started to build up at an unusually fast pace,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

China’s official purchasing managers’ index – covering China’s biggest, mainly state-backed firms – fell more than expected to 50.4 in May, the weakest reading this year and down from April’s 13-month high, with output at its lowest since November 2011.

The separate HSBC China manufacturing PMI, tracking smaller private sector firms, retreated to 48.4 from 49.3 in April – its seventh straight month below the 50-mark – with the employment sub-index falling to 48.1, its lowest level since March 2009.

India’s manufacturing sector held up better, with a survey showing factories kept up a steady rate of expansion in May, with fast-rising output evened out by slowing growth of domestic order books.

The HSBC manufacturing PMI, compiled by Markit, eased marginally to 54.8 in May from 54.9 in April. It has stayed above the 50 mark for a little over three years.