Reuters/London/Sydney
The global economy ended 2014 in a fragile state as factories struggled to maintain growth across Europe and Asia, business surveys showed, adding to pressure on central banks to implement more stimulus.
Ebbing price pressures across the continents offers room for the People’s Bank of China and the European Central Bank to do more to drive up inflation and support growth.
“Growth really does appear to be stalling based on these indicators so certainly the pressure is on, although we are less worried about China,” said James Knightley, senior global economist at ING.
On Thursday, ECB President Mario Draghi fanned expectations he would take bolder steps this month, saying the central bank stood ready to respond to the risk of deflation.
Consumer price data for the eurozone due on January 7 is widely expected to show a fall in annual terms. “With inflation set to fall sharply further, given what is happening to energy costs, those concerns that Draghi highlighted suggests we are going to get quantitative easing,” Knightley said.
The risk of a deflationary spiral, alongside a stagnating euro economy, will push the ECB to buy sovereign debt early in 2015, a Reuters poll showed last month.
The ECB council meets on January 22 and markets are wagering heavily it will finally decide to start buying sovereign debt, a major reason the euro hit 4-1/2 year lows yesterday.
Eurozone manufacturing concluded last year on a subdued note as output, new orders and employment all recorded sluggish growth. Also of concern to policymakers, activity was weak in Germany, Europe’s largest economy, while the downturn also deepened in France, the euro bloc’s second-biggest.
Markit’s final December manufacturing Purchasing Managers’ Index stood at 50.6, down from an earlier flash reading of 50.8 but beating November’s 17-month low of 50.1.
That is above the 50 mark that separates growth from contraction, but there was little sign of any improvement this month, with the subindex for new orders at just 50.2, leading factories to barely increase headcount in December.
British manufacturing expanded at a much weaker pace than expected in December, suggesting its contribution to the economic recovery ebbed further in the final months of 2014.
Global exporters should get some relief as the US shifts into higher gear, although they did not benefit as much from 2014’s recovery in the world’s biggest economy as they have in the past.
The US Federal Reserve has indicated it will start raising rates from rock bottom later this year as long as the economy continues to improve and unemployment falls further.
The US factory sector grew at its slowest pace in six months in December, a sign that weakness in the global economy is weighing on the US.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 55.5 last month from 58.7 in November.
A reading above 50 indicates expansion in the manufacturing sector, and the reading remains well above its two-year average. That means the slowdown appears unlikely to derail a broader strengthening of the US economy.
Prices for US Treasuries rose and the US dollar was up against a basket of currencies after the data. US stock indexes also were trading higher.
Still, the data suggests weakness abroad and a surge in the value of the dollar, which is near its strongest level since 2005, are inflicting pain on key parts of the US economy. A gauge of factory exports fell to 52 in December from 55 in the previous month.
At the same time, the weakness in global demand also has pushed oil prices lower, enabling American consumers to spend more and boost the US economy.
The economy went on a tear in the third quarter, when it grew at a 5% annual rate, and many economists expect a generally strong showing in the second half of 2014 will continue into this year, leading the US Federal Reserve to raise interest rates sometime in 2015.
The data suggested that employment in the factory sector rose more in December than analysts had expected, marking the 18th consecutive month of expansion in manufacturing employment sentiment.
A separate report showed US construction spending unexpectedly fell in November, held back by a drop in government outlays and by less money spent by businesses on projects other than homes.
Construction spending fell 0.3%, the first decline since June, to an annual rate of $975bn, the Commerce Department said.
China’s massive factory sector looked to have sputtered in December and across the region manufacturers struggled with weak demand, both at home and abroad.
China’s official PMI slipped to 50.1 in December from November’s 50.3, its lowest level of the year.
While the PMI for China’s services sector, which accounts for close to half of the economy, edged up to 54.1 from November’s 53.9, many analysts suspect 2014 economic growth has undershot the government’s 7.5% target, marking the weakest expansion in 24 years.
With factories able to make more than consumers wanted to buy, the pressure was intense to cut prices.
“The price measures show very strong disinflationary forces,” said analysts at Nomura. “We expect more policy easing in the first quarter, including a 50-basis-point cut in the bank reserve requirement ratio, to shore up domestic demand.”
In India, too, inflation has slowed to only 4.38% annually, the lowest since the government started releasing the data in 2012.
In South Korea, consumer prices grew at the slowest clip in more than 15 years in December, opening the door for further rate cuts there.
