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Global Manufacturing Slump Puts Reality Check on Trade Truce

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, according to reports Monday. China’s manufacturers saw sales, exports and production fall, while Germany suffered from weaker foreign demand. Exports from South Korea plunged almost 14%, and Japan’s Tankan confidence index dropped to a three-year low.

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 — or soon will be — to force the world’s major central banks into action. Investors are pricing in a Federal Reserve interest-rate cut this month — figures Monday are forecast to show U.S. manufacturing barely expanding — 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.”

The weakness in the factory numbers from IHS Markit was widespread. Switzerland saw manufacturing shrink the most in seven years, and Spain, long the euro area’s outperformer, registered its worst reading since 2013. Overall euro-zone manufacturing shrank for a fifth month, 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 also showed a decline in business optimism.

What Bloomberg’s Economists Say

“The euro-area economy has held up well recently, but the European Central Bank is clearly worried about the darkening prospects for demand. And the fragile truce reached by China and the U.S. at the G-20 meeting this past weekend is unlikely to provide much of a let up for manufacturers and exporters.”

— David Powell, senior euro-area economistClick here to read the full INSIGHT

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.

“We could have just changed the date and republished our old report on the last G-20 summit in December 2018,” Raymond Yeung, chief economist for greater China at Australia & New Zealand Banking Group Ltd., said in a note. “The U.S. has again held off new tariffs in exchange for China’s purchases of agricultural products. However, the U.S. did not promise that it won’t escalate its trade measures.”
Source: Bloomberg

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