Get 40% Off
👀 👁 🧿 All eyes on Biogen, up +4,56% after posting earnings. Our AI picked it in March 2024.
Which stocks will surge next?
Unlock AI-picked Stocks

Deflation alarms ring louder as EU, Chinese factories struggle

Published 02/02/2015, 06:42 AM
Updated 02/02/2015, 06:42 AM
© Reuters. Employee welds the exterior of a vehicle along a production line at a factory in Qingdao

By Jonathan Cable and Wayne Cole

LONDON/SYDNEY (Reuters) - European and Chinese factories slashed prices in January as production flatlined, heightening global deflation risks that point to another wave of central bank stimulus in the coming year.

While the pulse of activity was livelier in other parts of Asia - Japan, India and South Korea - they too shared a common condition of slowing inflation.

Central banks from Switzerland to Turkey via Canada and Singapore have already loosened monetary policy in the past few weeks.

The European Central Bank also announced a near-trillion-euro quantitative easing program in a bid to revive inflation and drive up growth, though much of the bloc's Purchasing Managers' Index survey was collated before that announcement.

"There are a lot of places where central banks are focusing on easing rather than anything else. In the euro zone the ECB is going all-out now," said Jacqui Douglas, senior global strategist at TD Securities.

"Looking at the rest of Europe we are expecting more easing from Sweden and Norway, that is where most central banks are leaning right now. There is no real rush to move ahead with rate hikes."

Markit's final PMI reading for the euro zone, published on Monday, was 51.0, in line with the flash estimate. Although at a six-month high, it was only just above the 50 mark that separates growth from contraction. In December the index came in at 50.6.

Worryingly for policymakers, firms cut prices in January at the steepest rate since mid-2013. Data on Friday showed annual inflation was a record-equaling low of -0.6 percent in January across the 19 nations using the euro.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

In Britain, manufacturing grew slightly faster but factories cut prices at the fastest pace since 2009. The Bank of England will keep interest rates at a record low until at least October, later than previously thought, a Reuters poll found last week. [GB/PMIM] [BOE/INT]

"With oil prices having stabilized at around $45 per barrel now, it seems likely that lower oil prices should continue to enable manufacturers to lower prices and so support demand," said Paul Hollingsworth at Capital Economics.

Still to come later on Monday is a sister manufacturing survey from Markit covering the United States, as well as the Institute for Supply Management's U.S. factory index, which is forecast to have slipped to 54.5 in January from 55.1.

EASING CHINA?

Earlier, a pair of surveys from China showed manufacturing struggling at the start of 2015 in the world's second biggest economy.

The Chinese HSBC/Markit PMI inched up a fraction to 49.7. But of more concern the official PMI, which is biased towards large factories, unexpectedly showed activity shrank for the first time in nearly 2-1/2 years.

The reading of 49.8 in January was down from December's 50.1 and missed a median forecast of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles.

Ordinarily, cheaper energy prices would be good for China, one of the world's most intensive energy consumers, but many economists believe the phenomenon is a net negative for Chinese firms because of its impact on demand.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

The PMIs only fueled bets on a weaker yuan and that more monetary easing was in store in Beijing too.

"China still needs decent growth to add 100 million new jobs this year, plus China is entering a rapid disinflation process," ANZ economists said in a note to clients.

"We (think) the People's Bank of China will cut the reserve requirement ratio by 50 basis points and cut the deposit rate by 25 basis points in the first quarter."

The downdraft has also spread into China's hitherto buoyant services sector, the lone bright spot in the economy last year. Service activity expanded at its lowest level in a year.

Slightly better news came from Japan, where the central bank has been pursuing an aggressive bond-buying campaign for over a year in a bid to revive growth and shake the country out of decades of deflation.

The final Markit/JMMA PMI edged up in January as the sustained weakness of the yen drove up exports. Improving exports were also a feature of South Korea's PMI which returned to growth for the first time in five months.

India's manufacturing activity continued to grow, though the headline index eased a touch but importantly for the prospect of more policy stimulus, cost pressures were the mildest in 70 months as commodity prices fell.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.