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World factory outlook darkens with weakening from Europe to Asia

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European factory activity plunged and Asian manufacturing output continued to weaken in July amid lingering supply-chain complications and a slowing global economy.

Purchasing managers’ indexes for the euro area’s four largest members all indicated contraction, with shrinking confirmed for the region as a whole after an initial estimate on July 22. In Asia, it was China, South Korea and Taiwan that took the biggest hit.

The reports reflect the darkening outlook for the world economy that forced the International Monetary Fund to last week lower its global growth forecast for this year and next, warning an outright recession may be just around the corner.

The euro area’s prospects in particular look increasingly dire, despite a bumper second-quarter expansion of 0.7%. Record-breaking inflation and the heightened likelihood of a Russian energy cutoff are threatening to inflict a slump in the 19-member currency bloc.

“Euro-zone manufacturing is sinking into an increasingly steep downturn, adding to the region’s recession risks,” said Chris Williamson, an economist at S&P Global. “New orders are already falling at a pace which, excluding pandemic lockdown months, is the sharpest since the debt crisis in 2012, with worse likely to come.”

In Asia, data showed China’s factory activity unexpectedly contracted in July, reversing earlier economic momentum as sporadic Covid-19 outbreaks weigh on the recovery.

The official manufacturing purchasing managers index fell to 49 from 50.2 in June. That compares with the 50.3 median estimate in a Bloomberg survey of economists.

Currencies weakened against the US dollar after the news out of Asia, led by the South Korean won and the Philippine peso. The Taiwan dollar fell to the key psychological level of 30 per the greenback for the first time in more than two years.

“Manufacturing companies in Taiwan painted an increasingly gloomy picture of conditions at the start of the third quarter,” Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said in a release. “Output and new business both fell at the sharpest rates since the early stage of the pandemic in May 2020, with firms often linking this to weaker global economic conditions.”

The slide in Asia’s export powerhouses is a clear warning for where global demand is headed as central banks aggressively raise borrowing costs to slow soaring inflation.

Factory gauges for the US are due later on Monday, expected to confirm an initial reading of manufacturing growth. The Institute for Supply Management’s gauge is seen falling to 52, which would be a two-year low.

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