Global factory activity sluggish

May 2, 2016 09:07 AM

Asian factories barely grew in April and those in the euro zone did little better despite heavy discounting, setting a sluggish tone on Monday for the global economy in the second quarter.

Japanese manufacturing activity shrank last month at the fastest pace in more than three years as major earthquakes disrupted production, while the former bright spot of India sank to a four-month trough and growth in China was all but flat.

The euro zone reading edged up only marginally, painting a more subdued picture of an economy that grew an encouraging 0.6% between January and March.

With manufacturing dogged by insufficient demand and excess supply, the regional readings are likely to reinforce the view that a recent pick-up in economic momentum will be difficult to sustain and further policy stimulus is needed.

"The backdrop remains one of sub-trend growth, inflation that is below target, difficulty in increasing revenue as margins are sacrificed to win modest volume gains, slow wage growth cramping spending and central banks that have used up much of their policy ammunition," said Alan Oster, chief economist at National Australia Bank.

That has been a factor in foot-dragging by the Federal Reserve over a follow-up to its December rate hike, leaving the markets in a sweat in case U.S. policymakers move in June.

The equivalent manufacturing reading from the U.S. Institute of Supply Management later on Monday was forecast to dip back to a modest 51.4, from 51.8, ahead of the always-pivotal payrolls report out on Friday.

While the Fed is contemplating when to hike next, the European Central Bank is preparing to buy corporate bonds as part of its trillion-plus euro asset purchase program.

So far, the massive ECB stimulus and weaker euro has yet to feed through to euro zone factories which operated only marginally faster in April.

Markit's Manufacturing Purchasing Managers Index (PMI) rose to 51.7 from March's 51.6, a marginal improvement from an earlier flash estimate of 51.5.

"The economy is growing but the pace is still very moderate. There's no reason to the ECB to change its policy stance," said Christoph Weil, economist at Commerzbank in Frankfurt.

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