Euro-zone woes cast pall across globe

Business activity in China fell at its steepest rate since March 2009, according to Markit's survey, which is sponsored by HSBC. Above, a factory in Wuhan, China. Reuters

Persistent gloom from the euro-zone crisis is casting a shadow over global factory output, trimming demand for goods from Europe to Asia.

Slowing growth in Germany and France, the traditional engines of the euro zone, contributed to output shrinking for the 13th month in a row in the single currency area.

Output also slid in China and South Korea, and growth slowed in India.

In the euro zone, the manufacturing sector was on course to act as a drag on third-quarter GDP, said Rob Dobson, the senior economist at Markit, which released the data yesterday.

"The uncertainty and cost caution resulting from the currency union's ongoing political and debt crises are now being reinforced by softer global economic growth," he said. "This is hitting domestic markets, intra-area trade and overseas trade alike and is one of the main factors underlying the job losses and excess capacity signalled by the latest PMI [purchasing managers' index] survey."

At 45.1, last month's reading was slightly higher than July's three-year low of 44.

With little indication of any resolution to the crisis, consumers and businesses in the euro zone have scaled back spending, hurting demand for goods.

As a result, Asian nations heavily reliant on exporting to Europe have suffered. Business activity in China fell at its steepest rate since March 2009, according to Markit's survey, which is sponsored by HSBC. The country's official PMI dropped below the 50 mark, which separates growth from a contraction, for the first time since November.

"China's manufacturing sector still faces intensifying downward pressure," said Hongbin Qu, the chief economist for China at HSBC. "New export orders fell at the fastest pace since March 2009. This combined, with a record high in stocks of finished goods and a 41-month low employment index, suggests China's exporters are facing increasing difficulties."

The data adds to worries the world's second-biggest economy may be cooling more quickly than many economists had initially forecast.

Readings from PMI data elsewhere in Asia revealed a similar picture. South Korea's reading remained below 50 for the third month. Taiwan's PMI slipped to its lowest level since in nine months.

Across many countries new orders remained weak as a result of nervousness linked to the euro-zone debt crisis and tepid growth in the United States.

Manufacturing output in India last month expanded at the slowest pace this year. Widespread power outages were partly blamed for the 52.8 reading, down from 52.9 in July. But the euro zone's problems also played a part. The currency area accounts for 15 per cent of India's total exports.

"With the slowdown partly supply driven and inflation risks still lingering, these numbers underscore that the room for policy rate cuts is very limited at the moment," said Leif Eskesen, the chief economist for India at HSBC.

Slightly higher than expected GDP results in the first quarter mean the Reserve Bank of India is expected to keep interest rates on hold for a fifth consecutive month when it meets this month.

China has already cut interest rates and has flooded cash into money markets in an effort to free up the flow of cash and stimulate the economy.

Speculation is mounting that the European Central Bank will revive its round of sovereign bond buying when it meets on Thursday. Spain and other periphery euro-zone nations are still struggling to access capital markets because of the high cost of borrowing.