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Global Manufacturing Slump Puts Reality Check on Trade Truce

July 1, 2019
For many, the situation is already poor enoughーor soon will beーto force the world’s major central banks into action.

Global manufacturing took another knock at the end of the second quarter, signaling a worsening economic growth outlook as U.S.-China trade tensions continue to simmer.

Across Asia and Europe, factory activity shrank in June, while the U.S. showed only meager growth, according to purchasing managers’ indexes. A global measure pointed to a second straight contraction, the first time that has happened since 2012.

Signs of weakness were widespread in reports on Monday, with Chinese manufacturers seeing declines in sales and production, and Germany suffering from weaker foreign demand. Exports from South Korea plunged almost 14%, and Japan’s Tankan confidence index dropped to a three-year low.

Even so, global stocks rallied as investors took their cue from a trade cease-fire announced by President Donald Trump and Chinese leader Xi Jinping at the Group of 20 meetings in Japan.

But broader gloom won’t be easy to dispel if the economic numbers continue to weaken. Morgan Stanley captured that view by downgrading its forecast for world growth, saying the truce wasn’t enough to remove the uncertainty around trade, which will weigh on the outlook.

For many, the situation is already poor enoughーor soon will beーto force the world’s major central banks into action. Investors are pricing in a Federal Reserve interest-rate cut this month and Goldman Sachs says the European Central Bank will lower its deposit rate by 20 basis points and restart asset purchases in September.

“Focusing on trade, perhaps there’s been some easing in the tensions. But if we step back and look at the economic data, what do we see? Bad news from China, nasty news from the Tankan, and in South Korea another poor export number,” said Jane Foley, head of currency strategy at Rabobank. “All this is really quite worrying, it reasserts that picture of a slowdown in global growth.”

In the US, IHS Markit’s PMI was better than a preliminary reading, but still near a decade low. The Institute for Supply Management’s factory index fell to the lowest since October 2016, and there was no growth in new orders.

Euro-zone manufacturing shrank for a fifth month in June, with the “challenging economic environment” leading to another drop in orders. In the U.K., the reading dropped to a six-year low. That’s partly an unwinding of Brexit stockpiling earlier in the year, but the report showed a decline in business optimism.

Sector-specific issues are also taking a toll. Germany is feeling the pain of turmoil in the auto industry, while waning demand in the electronics is hitting an industry that’s vital to many Asian economies. That’s on top of the trade friction between the world’s two biggest economies that’s far from being resolved despite the weekend agreement to resume negotiations.

“While the latest agreement to re-open negotiations is a positive at the margin, there have as yet been no concrete proposals that would address both sides’ fundamental concerns,” said Oliver Jones at Capital Economics in London. “We still judge it more likely than not that this will prove to be just another temporary reprieve.”

By Fergal O'Brien and Michelle Jamrisko

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