Global economy less robust than thought

Business activity weakened in China and Japan in April and growth slowed in Europe and the US, suggesting the global economy may be less robust than policymakers are predicting.

Global economy less robust than thought

In China, where the government has been engineering a rebalancing of its economy towards domestic spending and away from reliance on exports of manufactured goods, the preliminary purchasing managers’ index (PMI) fell to a one-year low of 49.2 from 49.6, according to data from HSBC/Markit. Economists polled by Reuters had expected it to remain steady. An index reading below 50 suggests contraction in the sector.

Analysts at Japanese bank Nomura said the Chinese data underscored their forecast for two more 50 basis point cuts in the reserve requirement ratio for Chinese banks, and three more 25 basis point interest rate cuts this year.

The People’s Bank of China cut its requirement for the amount of cash banks must hold as reserves by a full percentage point on Sunday.

Hopes of yet more stimulus have helped sparked a massive rally in the Chinese share market. The CSI300 index of the largest listed companies in Shanghai and Shenzhen has risen over 30% so far this year.

The Markit/JMMA preliminary Japan PMI for April also slid, to 49.7 from 50.3, as new orders continued to shrink and manufacturing production fell for the first time since July 2014. The data showed an increase in factory hiring, however.

At next week’s policy review, the Bank of Japan is expected to hold off on expanding its already massive monetary stimulus but may lower its inflation forecasts.

A sudden drop in the eurozone flash composite Markit Purchasing Managers’ Index (PMI) was driven by sharply slower growth in manufacturing orders in Germany and France, suggesting recent optimism about the eurozone may be overdone. Markit’s eurozone composite PMI fell to 53.5 from 54.0, below both the 54.4 consensus and the lowest forecast in a Reuters poll. This marks the first major eurozone indicator that has disappointed all forecasts in quite some time, and comes just a month after the European Central Bank began purchasing government bonds to stimulate the economy.

Factory order growth slowed in France, but also in Germany, suggesting more subdued activity ahead. Both the flash manufacturing and services PMIs for France and Germany fell below the lowest forecast. For the eurozone, only the service PMI didn’t.

“There is a clear risk that the composite PMI falls further as concerns about the situation in Greece and a possible euro exit intensify, raising the threat of a renewed economic slowdown in the eurozone,” said Jessica Hinds, European economist at Capital Economics.


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