JAN 5 – Manufacturing activity around the world fell sharply in December, suggesting that the recession hitting the US and many other countries will extend well into 2009, if not longer, and that unemployment will rise globally.
Data and surveys published at the start of the new year – including from China – add to the gloom about the world economic outlook.
A broad index of change in US manufacturing activity fell to its lowest level since June 1980, when the American economy was on the verge of a severe double-dip recession, according to the Institute for Supply Management. Not one of the 18 industries surveyed reported growth, and some, such as wood products, have been in decline for more than two years.
New orders, a gauge of future activity, sank to the lowest index level since US records began 60 years ago. Exports and production also sank, and employment levels declined. The downturn in demand for manufactured goods is prompting US companies of all sizes to lay off workers, shut down plants and reduce production of machinery, steel, plastics and other basic components.
In the wake of the data, a top US Federal Reserve official on Sunday urged “pulling out all the stops” by implementing a fiscal stimulus programme to turn around a possible long period of economic stagnation in the US, according to Reuters.
“The financial and economic firestorm we face today poses a serious risk of an extended period of stagnation,” said Janet Yellen, president of the San Francisco Federal Reserve Bank, according to Reuters. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.”
Separate surveys of manufacturing activity around the world released Friday, the first business day of the new year, also were bleak.
Manufacturing is a key component of a country’s gross domestic product, and the data often serve as a barometer of future economic growth.
Nevertheless, on Friday, stock markets around the world shrugged off the manufacturing numbers, posting gains in Hong Kong, Seoul and Europe on light trading volume. The Dow Jones Industrial Average climbed 258.3 points, or 2.94 per cent, to close at 9034.69. Some analysts say global weakness is already priced into shares, which in the US just had their worst year since 1931.
Manufacturing activity contracted in Germany, France, Italy and Spain, pushing the Markit Economics survey of euro-zone manufacturing last month to the lowest level in its 11-year history. In Russia, the VTB Bank Europe manufacturing index fell to its lowest level since it began in September 1997.
The data from Asia also looked grim. A purchasing managers index, or PMI, survey released Friday by brokerage firm CLSA showed output of Chinese factories fell at a record clip in December. With the index signalling contraction from five months, beginning in August, China’s manufacturing sector “is close to technical recession,” said Eric Fishwick, head of CLSA Economic Research, which does the survey with Markit Economics.
On Sunday, the official PMI for December by the China Federation of Logistics and Purchasing showed similar results, though it found the contraction wasn’t as sharp as before.
Zhang Lijun, an analyst for the federation, said in a statement that China’s economy “remains in a downturn, but shows signs of pacing around the bottom.”
An economic cooling is also continuing in India, the other Asian giant heralded earlier for rapid growth. Indian manufacturers cut jobs for the first time in the history of a survey done by ABN Amro Bank and Markit.
Indian manufacturing activity in December fell to its lowest levels since the survey began in 2005.
The simultaneous woes of manufacturing in rich and poor countries are something new in the global economy. In the past, weaknesses in US and European manufacturing meant a windfall for developing economies, which took up the slack.
Hong Kong, which like the euro zone slipped into recession in the third quarter, saw manufacturing activity as surveyed by Markit decline for the sixth straight month.
Also last week, Japan’s Nomura/JMMA index of manufacturing sank to a new low, due to a reduction in overseas demand and the deteriorating global economy.
The spreading and deepening manufacturing slump has some experts worried that the global economy in 2009 won’t fare much better than last year.
J.P. Morgan’s global manufacturing index, released Friday and compiled from surveys in 19 countries, reached a new low in December, consistent with a “severe” 17 per cent annualised contraction in global activity.
J.P. Morgan estimates global output declined 4 per cent in the last three months of 2008 compared to the previous quarter, reflecting reduced spending and available financing on autos, housing and capital equipment.
Manufacturers around the world have already begun layoffs to conserve cash and reduce production, but many more are expected this year.
The job cuts are coming across industries and borders. Nickent Golf, a golf-club manufacturer in the Los Angeles area, recently cut assembly workers in China and the US to cope with falling demand.
In Elbow Lake, Minnesota, Cosmos Enterprises Inc., which makes metal and plastic parts for manufacturers including car and farm-equipment makers, has cut capacity, and in October it laid off five machinists and one quality inspector.
“What is 2009 going to bring? There’s a scary thought,” says sales manager Kelly Chandler.
The struggles of big steel companies are particularly troubling, because that industry’s health is considered an early indicator of how other industries are faring. ArcelorMittal, US Steel Corp. and AK Steel all have announced layoffs in the US or Canada.
In the US, mills that produce raw steel are working at only about 43 per cent of capacity.
Gerdau Macsteel Inc, a specialty steel maker, said it would eliminate 300 employees by Jan 16 at its Jackson, Michigan, plant, although it is unclear whether the layoffs will be permanent. The steelmaker has been hit especially hard because about half of its output goes into automotive applications.
The US shed some 1.9 million jobs in 2008, through November, and the unemployment rate, currently 6.7 per cent, is expected to rise when the government reports December figures this Friday.
The surveys “underscore the depth of the global recession, which w believe will prove to be the worst in the postwar era,” says Nigel Gault, an economist with IHS Global Insight. His firm estimates that US gross domestic product declined at a 5.6 per cent annualised rate in the fourth quarter.
“With no evidence that the rate of contraction is moderating, we expect declines almost that large in the first quarter of 2009,” he says.
“The long-awaited fiscal-stimulus package cannot come soon enough.”
In Germany, Europe’s largest economy, machinery, equipment and automakers are struggling.
Volkswagen AG, Europe’s largest car maker, said on Dec 9 that waning sales may make it harder to reach growth targets for 2010. BMW and Mercedes-Benz both saw about 25 per cent drops in November sales.
Unemployment across the euro zone hit 7.7 per cent in October, its highest level in nearly two years. The rate is expected to continue rising this year.
In December, European Central Bank staffers forecast the euro-zone economy will contract by about 0.5 per cent in 2009. Many private-sector economists contend that prediction is too optimistic, arguing that the bloc could face its sharpest recession since World War II.
The global manufacturing decline could put pressure on governments to pull harder on monetary and fiscal levers.
The European Central Bank, in particular, has been criticised for failing to move rapidly enough, despite cutting its key rate by 1.75 percentage points since October, to its current 2.5 per cent. By contrast, the Fed has slashed its lending rate to near zero per cent. Investors are betting the ECB will lower its rate by another half percentage point to 2 per cent at its next meeting on Jan. 15. – The Wall Street Journal Asia
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