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March 25, 2019

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Global industrial output declines, hits hopes of economic recovery

Manufacturers in Europe, Japan and the United States were hit in March as trade tensions had affected factory output, a setback for hopes that the global economy might be turning the corner on its slowdown.

Factory activity in the 19-country eurozone contracted at the fastest pace in nearly six years; in Japan, it was the lowest in almost three years; and in the US, it was the worst since June 2017.

German 10-year bond yields, which plunged on Thursday after the US Federal Reserve signaled no more rate hikes this year, dived again to below zero.

In New York, the US 10-year Treasury note yield plunged to a 14-month low as growth worries further weighed on inflation expectations.

That benchmark yield dropped below the yields on all maturities of T-bills for the first time in 12 years, a so-called yield-curve inversion that is often a harbinger of recession.

“While such an inversion has traditionally been an indicator of a recession, this time around it may be less about the prospects for the US economy and more about spillovers from what is happening in Europe and the bond market there, together with the effects of the Fed’s surprising decision to be very dovish again with its unconventional policy tools,” said Mohamed El-Erian, chief economic adviser at Allianz in Newport Beach, California.

US stocks, European shares and the euro also fell on Friday.

Global trade tensions continue to be among the main causes of the gloom.

“No other factor shapes the eurozone business cycle more than the ups and downs of global trade,” economists at Berenberg Bank said.

The United States and China are due to resume face-to-face talks next week, but it is unclear if the two sides can narrow their differences and end the trade war between the world’s two largest economies.

European officials are also worried about the risk of US tariffs to car imports from Europe.

The drop in the eurozone’s manufacturing purchasing managers index to a 71-month low of 47.7 from 49.4 in February raised the risk trade flows could turn even more negative in the short term, the Berenberg economists said.

The manufacturing downturn was partly offset by stable “but relatively weak” growth in the eurozone’s dominant services industry.

But the surveys suggested the bloc’s economy had a poor start to 2019.

IHS Markit, which published the surveys, said the PMIs pointed to first-quarter economic growth of 0.2 percent in the eurozone, below the 0.3 percent predicted in a Reuters poll last week.

The eurozone grew 0.2 percent in the final three months of 2018, its slowest pace in four years.

Earlier this month, the European Central Bank changed tack by pushing out the timing of its next rate increase until 2020 at the earliest and said it would offer banks a new round of cheap loans to help revive the economy.

“We highlight downside risks mainly stemming from the external side — e.g. trade tensions” and a global slowdown, said Barclays economists Radu-Gabriel Cristea and Francois Cabau about the eurozone.

“The protracted weakness in manufacturing remains a lingering risk and overall growth concerns are likely to intensify should the industrial backdrop further deteriorate. At the same time, Italy and Brexit woes remain non-negligible, the uncertainty a further drag on sentiment.”

In the US series, Markit’s measure of manufacturing activity slipped to 52.5 in March from 53 in February, falling short of economists’ forecasts for a modest rebound. Markit’s manufacturing output index was the weakest since June 2016.

“The survey is consistent with the official measure of manufacturing production falling at an increased rate in March and hence acting as a drag on the economy in the first quarter,” Markit’s chief business economist, Chris Williamson, said.

US GDP is forecast to expand at an annualized rate of 1.6 percent this quarter, down from the 2.6 percent in the fourth quarter of 2018, according to a Reuters poll of more than 100 economists released last week. In last month’s poll, first-quarter growth had been pegged at 1.9 percent.

The headline Flash Markit/Nikkei Japan Manufacturing Purchasing Managers Index was a seasonally adjusted 48.9, the same as February’s final reading — the second straight month below the 50 mark that separates contraction from expansion.

“Concern of weaker growth in China and prolonged global trade frictions kept business confidence well below its historical average in March,” Joe Hayes, an economist at IHS Markit, said. The flash index for total new orders — domestic and foreign — hit its lowest since June 2016.


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