Factory output subdued going into 2012

Global manufacturing activity was subdued going into 2012, with the euro zone's industrial sector suffering its fifth straight month of declines in December and Asian factories mostly stuck in a rut.

Reuters,

2 January 2012

Monday's purchasing managers indexes (PMIs) provided further evidence that Europe is unlikely to avoid a recession.

The rate of decline of activity in euro zone factories eased slightly to raise hopes the downturn will not be as severe as feared, though hiccups in the Spanish and Czech deficit reduction programs emphasized the extent of the continent's debt troubles.

With Asian PMIs showing a clear lack of momentum in the vast industrial economies of China and South Korea, the United States seems to be one of the few major economies showing signs of an upturn, even if modest and uncertain.

Economists expect the U.S. ISM manufacturing survey due at 1500 GMT on Tuesday to show American factories expanded at a faster pace in December.

The Eurozone Manufacturing Purchasing Managers' Index (PMI) rose slightly in December to 46.9 from November's 28-month low of 46.4, but marked a fifth month below the 50 mark that divides growth from contraction.

Compiler Markit said levels of production and new orders fell in all of the euro zone countries covered by the survey for the second month running.

"These numbers are consistent with our view that it's going to be a normal recession," said Dirk Schumacher, senior European economist at Goldman Sachs in Frankfurt.

"Still painful, no doubt about that, but there's no indication that it's going to look like anything like around the end of 2008, so far."

Reuters polls of economists suggest the euro zone economy is already stuck in a recession that will last until the second quarter of 2012. They forecast the economy will probably see no growth this year.

Indeed, most economists now expect the European Central Bank (ECB) to counter this by cutting interest rates to 0.75 percent in the next few months, below their record low 1.0 percent.

The PMIs showed the euro zone's peripheral economies tanking in December, with Spain's manufacturing slump extending to eight months, putting pressure on the government to help drive a return to economic growth as it struggles to cut its debt.

Madrid's public deficit for 2011 may be even higher than the above-target 8 percent of gross domestic product forecast by the new centre-right government on Friday, Economy Minister Luis de Guindos said on Monday.

The Czech Republic could let its public deficit grow above target this year if the economy contracts, its Prime Minister Petr Necas was quoted as saying on Monday.

Worries about the financing of highly indebted European countries sent the euro to a decade low against the Japanese yen on Monday, though moves were exacerbated by thin holiday trade.

ASIA WOBBLES

Asian factory output remained weak in December, with Chinese manufacturers narrowly avoiding contraction and South Korea's industrial production shrinking the most in almost three years.

Taiwan, meanwhile, saw its industrial sector contract for a seventh straight month.

"Although production and new business inflows are still declining, the pace of deterioration eased across the board for the second straight month," HSBC economist Donna Kwok said of the Taiwan data on Monday.

Worries have grown that China, the world's second-largest economy, is headed for sharply slower growth, undermining its ability to offset looming recession in debt-laden Europe and an uncertain U.S. recovery.

China's official purchasing managers' index, released Sunday, edged up to 50.3 in December from 49 in November.

China is widely expected to announce new policy measures to help boost growth, starting with a cut in the required ratio of reserves it demands commercial banks hold, after trimming it by 50 basis points in November from a record high of 21.5 percent.

India, by contrast, saw strong factory activity in December that defied recent weakness in Asia's third-largest economy.

Activity in the manufacturing sector rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated (industrial production) data would suggest," said Leif Eskesen, economist at HSBC.

Economists expect the U.S. ISM manufacturing survey - another PMI - to rise to 53.2 in December from November's 52.7, which was the best showing since June.