Global economy: manufacturing sector grows in euro zone, Japan

London, Aug 1 | Updated: Aug 2 2005, 05:30am hrs
Manufacturing activity hit an 11-month high in Japan in July and returned to marginal growth in the euro zone, but UK manufacturers are struggling and the Chinese economy may be cooling, survey data shows.

The surveys of manufacturers, compiled by British-based NTC Research, showed European factories remain critically dependent on exports and gave an ambivalent picture of demand for goods in China. However, the equivalent US survey is expected to show relatively robust demand in the worlds biggest economy. Economists predict that the US index, due to be released by the Institute for Supply Management at 1400 GMT, will rise further above the 50 level which divides manufacturing growth from contraction, to 54.5 in July from 53.8 in June.

Weve already had last Friday an impressive set of numbers from the US which was indicative of the US economy going into the second half of the year with a considerable head of steam behind it, said James Nixon at Barclays Capital in London, referring to official US economic growth data. In the euro zone, the NTCs Purchasing Managers Index (PMI) climbed to 50.8 from 49.9 in June as a weaker currency spurred sales of equipment to manufacturers overseas. Japans PMI rose to 54.1, the highest reading since last August, and NTC said there were signs of stronger demand at home as well as from overseas, including China.

But the UK Purchasing Managers Index fell to 49.2 in July from 49.6 due partly to persistently weak consumer demand in the euro zone, Britains biggest export market. In China, NTCs index rose to 51.5 in July from 51.0 in June, signalling slightly stronger growth, but it was still the third-weakest level since the index was launched in April 2004. Combined with a fall in Chinas official PMI for a fourth straight month, to 51.1 from 51.7 in June, this reinforced concerns within China that the economy may be cooling. Decreasing growth of the consumer price index, dropping enterprise profits, as well as losses in downstream industries are all signals that Chinas economy has taken a cooling trend, Wang Jian, a top researcher with the National Development and Reform Commission, was quoted as saying by the Xinhua news agency.

In the euro zone, NTC said all countries seemed to be benefiting from the euros steady decline from highs above $1.36 late last year to around $1.20 during July. (But) without the strengthening growth that were seeing overseas, the exchange rate benefits would certainly not be as great, said Chris Williamson, NTCs chief economist. Manufacturers everywhere are being squeezed between high oil prices at around $60 per barrel and the need to hold down costs to remain internationally competitive. In the euro zone, the PMI showed manufacturers cut more jobs than they created in July for the 50th month running, and the survey is unlikely to change economists expectations that the European Central Bank will keep official interest rates at historic lows of 2.0 percent when it meets on Thursday. The British PMI reinforced expectations that the Bank of England will cut interest rates on Thursday for the first time in two years, to 4.50 percent from 4.75 percent, after official second quarter data showed manufacturing fell into recession.