Friday, December 2, 2011

GLOBAL ECONOMY-Global factories stall, IMF to cut GDP forecasts

WASHINGTON/LONDON ( Dec 1): Manufacturing activity contracted in the euro zone and much of Asia in November, pointing to a global slowdown even as growth in the United States appears to be shifting into higher gear.

Thursday's weak manufacturing surveys from the two regions underscored the ripple effects from Europe's debt crisis, which has caused turmoil in financial markets.

The United Nations sharply downgraded its forecast for global growth next year, and the International Monetary Fund said it would cut its projections next month.

"If you were to ask me it (global economic outlook) will be revised downwards, undoubtedly," IMF Managing Director Christine Lagarde told reporters in Brasilia. "The global economic outlook will be lower, and in certain parts much lower than what we had initially envisaged."

The Global Manufacturing PMI, produced by JPMorgan with research and supply management organizations, fell to 49.6 in November from October's 49.9 -- evidence of an overall contraction in world factory activity.

In the euro zone, factory activity shrank at its fastest pace in two years, reinforcing the view that the debt-strapped region was already in recession. British manufacturing also contracted at the fastest pace in two years, raising the risk that the UK economy may suffer the same fate.


But the United States is charting a different path. U.S. manufacturing regained momentum last month, boosted by strong growth in new orders and exports.

That added to a raft of data, including retail sales and industrial production, indicating an acceleration in economic activity in the fourth quarter.

"The key risks remain external. The euro zone is tipping into recession, and China is slowing, bad news for export prospects," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. "But if the euro zone financial crisis can be contained, there's enough momentum on the domestic side to keep the U.S. moving forward."

The UN slashed its forecast for global growth next year to 2.6 percent from a 3.6 percent prediction made just six months ago. It said it expected the world economy to "muddle through" in 2012, propelled by higher growth in developing economies, but that "risks for a double-dip recession have heightened."

China's official purchasing managers' index showed factory activity shrank in November for the first time in nearly three years, while a similar Indian PMI showed factory growth nearly stalled.

Both China and Brazil eased monetary policy on Wednesday. That came amid coordinated action from the world's biggest central banks to try to prevent another credit crunch by lowering the cost of dollar swap lines.

"The big picture here is this is an unwinding of a 20-year debt bubble," said Peter Dixon, global financial economist at Commerzbank. "It's going to be painful, and it's going to be nasty. What policymakers are aiming for is a smoothing of the path."


But policymakers appear to be getting more worried.

Zhu Guangyao, China's advance coordinator to the Group of 20 talks and a vice finance minister, said heavily indebted countries had limited scope to act, which will make it harder to sustain global growth as the European debt saga drags on.

"The current crisis, to some extent, is more serious and challenging than the international financial crisis following the fall of Lehman Brothers," Zhu said. "It's keenly important for countries around the world to work together in the spirit of 'co-operating in the same boat'," he added.

After the Lehman bankruptcy, G20 countries committed trillions of dollars to boosting growth and backstopping banks, and central banks cut interest rates to record lows.

But rates are still near zero in the United States, Japan and Britain, and public finances have deteriorated around the world, leaving less space to counter a European downdraft.

Fast-growing emerging markets such as China, Brazil and India led the recovery in 2009, and they are still growing far more rapidly than most developed economies. But they are not immune to weak demand from Europe or the United States.

The weaker-than-expected China PMI reading came one day after Beijing lowered banks' reserve requirements by 50 basis points to try to ease credit strains.

Just a few months ago, inflation was the primary concern for most of Asia's economies. But Europe is the top export destination for many countries including China, so when its crisis intensified, Asia's growth prospects dimmed.

South Korea's factory activity shrank for a fourth consecutive month in November, and in Indonesia, year-on-year export growth slowed sharply in October.

India bucked the trend, reporting a pick-up in export orders, although its overall PMI dipped in November on weak domestic demand. ' Reuters


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