World economy ends the year in fragile state

The global economy is ending the year in a fragile state with factory activity shrinking in China, eurozone business growth remaining weak, and emerging market giant Russia in a spiralling currency crisis.

“These are uncertain times again and there is a risk of another global downturn,” said Stephen Webster, chief European economist at 4CAST.

Poor to mediocre business surveys in Asia and Europe released yesterday are likely to put pressure on both the ECB and People’s Bank of China to come up with more stimulus. They also threaten the 2015 outlook given the two economies’ huge global reach.

But it was events in Russia that were most eye-catching. Its central bank took drastic action to defend its rouble currency in a surprise midnight raising of interest rates by 650 basis points to 17%. But despite that the rouble was down some 4% against the dollar. It has lost around 50% to the dollar this year.

The Russian economy still depends in large measure on sales of oil and gas, which account for about two-thirds of exports, and Indonesia became the latest Asian casualty as its currency caved to fresh 16-year lows.

Russia, however, is also being hit by Western sanctions over its relations with Ukraine. Eurozone businesses are ending 2014 in slightly better shape than thought but growth remains weak and firms are still cutting prices to encourage trade.

Markit’s Composite Flash Purchasing Managers’ Index, based on surveys of thousands of companies and seen as a good growth indicator, rose to 51.7 from a 16-month low of 51.1. Still, German analyst and investor sentiment rose sharply in December for a second month running, as a decline in the euro and oil prices boosted hopes for a pick-up, although a composite PMI covering Europe’s largest economy showed weaker growth.

Coupled with a PMI for France, which highlighted a continued decline, the eurozone survey suggested there was a renewed upturn in the bloc’s smaller periphery countries. Inflation in the bloc cooled to a five-year low of just 0.3% last month, well within the ECB’s “danger zone”, adding to expectations for more policy easing.

Weak growth and deepening concern that plunging oil prices may send the eurozone into a deflationary spiral that will push the ECB to buy sovereign debt early next year, a Reuters poll found last week. The mood in Asia was little better after a measure of Chinese manufacturing activity from HSBC/Markit fell to 49.5 in December from November’s 50.0. Anything below 50 indicates contraction.

“The manufacturing slowdown points to a weak ending for 2014,” said Hongbin Qu of HSBC. “The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months.”