Factories prove economic momentum will carry through to second half
London/Hong Kong — Factories across the world powered into July, providing evidence that economic momentum has carried through into the second half despite central banks in the West preparing to start scaling back years of massive stimulus.
Growth in the eurozone remained buoyant, British manufacturing recovered in July from a seven-month low and Chinese factory activity unexpectedly expanded. A survey due later from the US is expected to suggest factories chugged along at a slightly more modest, but still solid, pace.
"The world economy was doing quite well in the second quarter and nothing has changed in July. The overall picture is pretty healthy," said Andrew Kenningham at Capital Economics. "There is nothing immediately on the horizon to cause the global economy generally to slow. Central banks are moving very slowly to remove stimulus — but it is very slow and cautious so I don’t think it will cause any problems."
China and the eurozone are key to the second-half outlook, with those regions seen driving a larger share of the global recovery because political turmoil in Washington imperils President Donald Trump’s plans to pass stimulus plans.
Last week, the International Monetary Fund upgraded its growth projections for China and Europe, while keeping its global forecast at 3.5%. Full-year growth in China is widely expected to meet the government’s target of 6.5% handily, but most analysts predict the broader economy will begin to cool eventually as regulators maintain a clampdown on riskier types of lending.
In the second quarter, the eurozone economy expanded 0.6%, matching a median forecast in a Reuters poll and confirming the bloc’s robust recovery. It will give the European Central Bank (ECB) more grounds for tweaking its monetary policy in the autumn. In September, the ECB is expected to announce a shift away from its ultra-easy policy, according to a Reuters poll.
While the US Federal Reserve and ECB are expected to slowly normalise policy after years of cheap money, many Asian central bankers are likely to be more cautious about tapping the brakes for fear of derailing their recoveries.
Australia’s central bank kept its cash rate unchanged at a record low 1.5% on Tuesday, despite saying the domestic and global economy continue to improve.
Still, signs British factories had a good month should hearten Bank of England policy makers ahead of Thursday’s interest rate announcement, but more focus will be on Thursday’s purchasing managers’ index (PMI) for the services industry, which drives the bulk of the Britain’s economic output. Only two of 80 economists polled by Reuters think the Bank of England will raise its main interest rate this week.
Markit’s final manufacturing PMI for the eurozone dipped to 56.6 from June’s six-year high of 57.4, slightly down from a flash estimate of 56.8. Any reading above 50 indicates growth.
Pointing to momentum continuing, new orders remained firm, backlogs of work built up and hiring was strong. The expansion came despite factories increasing prices for the 10th month.
Tuesday’s Markit/CIPS UK Manufacturing PMI rose to 55.1 from a downwardly revised 54.2 in June, exceeding the 54.4 consensus in a Reuters poll. "A combination of the weaker pound and increasing global growth optimism is boosting sentiment amongst firms," said James Smith at ING.
China’s Caixin/Markit PMI rose to a four-month high of 51.1, well ahead of June’s 50.4, as export orders flooded in.
The findings were more upbeat than official data on Monday, which suggested a slight loss of momentum, but taken together they pointed to continued resilience in the world’s second-largest economy and the possibility its industrial recovery may last a bit longer than expected.
"The key takeaway from the PMIs is China, which shows that the momentum is still ongoing into the start of the third quarter," said Khoon Goh at ANZ. "We do expect a bit of a growth slowdown [in Asia] in the second half, but full-year growth numbers [are expected to] be an improvement from last year’s."
Threats of growing US protectionism continues to hang over Asia’s trade-reliant economies. Though Trump did not follow through on many of his protectionism threats made during the campaign, there are signs the US administration is growing frustrated at a lack of concessions from its major trading partners.
So the picture was mixed for Asia, with factory activity shrinking in Indonesia and Malaysia. India, one of the world’s fastest growing economies, saw its manufacturing sector slam into reverse, as a new goods and services tax sowed confusion among producers.
In Japan, there were signs that sluggish domestic demand is picking up, though stubbornly low inflation likely means its central bank will not pare back its radical stimulus until long after the Fed and ECB.