Clouds darken over global outlook

A employee works at the new A-Class Mercedes-Benz passenger car at the Mercedes-Benz factory on July 16, 2012 in Rastatt, Germany.

Story highlights

  • Eurozone factory activity slows to four-month low in April in key business survey
  • Markit purchasing managers' index falls to 46.5 in April
  • Index reading below 50 indicates contraction
  • Germany, eurozone's largest economy, saw index reading fall to six-month low
Signs of weakness clouded the world economic outlook on Tuesday after a leading business survey indicated the contraction in eurozone manufacturing activity gathered pace this month, while industrial expansion also slowed in the US and China.
The closely-watched flash -- or initial -- Markit purchasing managers' index for euro-area manufacturing dipped to a four-month low of 46.5 in April, far below the 50 level that separates growth from contraction. The composite index for Germany, the bloc's largest economy, fell sharply to 48.8, a six-month low.
Separately, Spain's central bank estimated the Spanish economy contracted by 0.5 per cent in the first three months of the year despite a pick-up in exports.
With top eurozone officials increasingly concerned that the bloc has hit the political limits of austerity in the face of growing opposition in recession-hit countries, the gloomy data add to pressure on the European Central Bank to cut rates next week.
The manufacturing PMIs also suggested manufacturers in the world's two largest economies were suffering from a slowdown in global economic activity.
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Julian Callow, economist at Barclays, a bank, said: "The conventional wisdom was that the global recovery would gain momentum as the year rolls on. But if you look at what has happened to manufacturing confidence in recent months, it's looking a little more doutbful that the world economy will pick up in the second quarter."
Last week, the International Monetary Fund called for more economic stimulus after shaving its estimate for global growth this year from the 3.5 per cent forecast in January to 3.3 per cent. The fund also cut its estimate of eurozone output, forecasting that the bloc's economy will shrink by 0.3 per cent this year, rather than the 0.1 per cent contraction predicted at the start of the year.
Even the hawks on the ECB's governing council have signalled they would consider a rate cut from 0.75 per cent if macroeconomic indicators continued to worsen. If the governing council acts next Thursday, analysts say it is most likely to chop a quarter percentage point off the main refinancing rate and leave the zero per cent deposit rate untouched.
But some are sceptical that such a step would have any impact on companies based in the credit-strapped southern euro-area countries. The ECB has acknowledged that the "transmission mechanism", whereby its rates translate into real-world borrowing costs in countries such as Spain and Italy, has broken down.
The flash PMI for the US fell to 52 in April -- the weakest level since last November -- from 54.6 last month.
The manufacturing PMI for the US showed the weakest rise in new orders for six months, although new export orders grew at a stronger rate than last month, indicating a slowdown in domestic demand as part of a delayed reaction to last year's fiscal tightening.
The HSBC/Markit manufacturing flash PMI for China dipped to a two-month low of 50.5, from 51.6 the previous month.
Both the US and Chinese PMIs are relatively new and untested. The manufacturing ISM figure -- the most closely watched barometer of manufacturing activity in the US -- is out on May 1.