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BW Businessworld

Manufacturing Slump Eases As World Emerges From Pandemic

The International Monetary Fund expected the global economy to shrink 4.9% this year and rebound just 5.4% next year.

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A slump in global manufacturing showed signs of easing in June as a rebound in China's activity offered some hope Asia may have passed the worst of the devastation caused by the coronavirus pandemic, while the collapse in European factory activity abated.

But sluggish global demand and fears of a second wave of infections will tame any optimism on the outlook and keep pressure on policymakers to support their ailing economies.

Globally, the pandemic has infected more than 10 million people and killed more than 500,000. A resurgence in new cases in several countries has prompted some governments to backpedal on plans to reopen their economies and fueled concerns the worst is still to come.

"No intermission, no glass of bubbly, just straight into the second half of 2020. And the outlook? Better than the first half, but not as good as it could be," said Robert Carnell at ING.

In its latest projections, the International Monetary Fund expected the global economy to shrink 4.9% this year and rebound just 5.4% next year.

A recent Reuters poll put this year's contraction at a more modest 3.7% but said in a worst case scenario the global economy would shrink 6.0%.

Still, a series of business surveys released on Wednesday showed broad improvements in manufacturing across Europe and Asia in June from depths hit in April and May. Activity in some economies swung to growth while declines in other places slowed.

The downturn in euro zone manufacturing was not as bad as initially thought last month after more economies in the bloc eased restrictions imposed to quell the spread of the coronavirus, a survey showed.

With transmission rates of the virus falling in much of Europe, and economies opening up, IHS Markit's final euro zone Manufacturing Purchasing Managers' Index (PMI) moved closer to the 50-mark separating growth from contraction in June.

It rose to 47.4 last month, up from May's 39.4 and comfortably ahead of an earlier flash reading of 46.9. An index measuring output jumped to 48.9 from 35.6.

Germany's manufacturing sector also contracted at a slower pace as Europe's largest economy lifted restrictions. Its economy will gradually recover and is likely to return to last year's level at the end of 2021, economic institute Ifo said on Wednesday.

French factory activity bounced back to modest growth and in Britain, outside the currency union, the historic collapse eased further as companies reported a small increase in output.

Activity in the United States almost flatlined, later data is expected to show.

But global stocks struggled for momentum on Wednesday as the improving economic data was offset by concern surging coronavirus cases in the U.S. could derail the world's recovery before it properly begins.

TIGER BALM

In China, factory activity grew at a faster clip in June after the world's second-largest economy lifted coronavirus lockdown measures, the Caixin/Markit PMI showed.

Manufacturing activity also expanded in Vietnam and Malaysia, pointing to a slow but steady recovery ahead.

India's manufacturing activity contracted for a third straight month in June but at a much slower pace, as both output and new orders shrank at softer rates.

Similarly, the export powerhouses of Japan and South Korea continued to see manufacturing activity decline, albeit at a softer pace.

China's Caixin/Markit PMI rose to 51.2 in June from 50.7 in May, marking the highest reading since December 2019. That followed a similarly upbeat reading from the Chinese government's own PMI on Tuesday.

Vietnam and Malaysia also saw their PMIs crawl back above the 50-mark, a welcome sign for policymakers struggling to combat the pandemic's fallout.

"The host of PMI data release this morning offers some reassuring signs the outlook for the crucial manufacturing sector continues to be on the mend," said Wellian Wiranto, an economist at OCBC Bank.

But analysts expect any recovery in the region to be slow.

While China's export orders shrank at a slower pace, its employment contraction worsened, the PMI showed, underscoring the fragile recovery.

"Overall manufacturing demand recovered at a fast clip, but overseas demand remained a drag," said Wang Zhe, senior economist at Caixin Insight Group.

Japan's PMI rose to a seasonally adjusted 40.1 in June, while South Korea's PMI ticked up to 43.4 - both remaining far below the rise-or-fall threshold of 50.

Separately, a Bank of Japan survey showed big manufacturers' confidence sinking to levels last seen during the 2009 global financial crisis, reinforcing expectations the country was sinking deeper into recession.

"If demand doesn't rebound fast enough, companies will have to shed jobs," said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research and Consulting. "That will delay Japan's economic recovery, which could end up in a L-shape."

(Reuters)