May 2, 2016 / 5:41 AM / a year ago

Sluggish factory activity sets global tone for second quarter

An engineer makes an arm rail for residential buildings inside a metal processing factory at an industrial zone in downtown Tokyo, Japan, March 22, 2016. REUTERS/Yuya Shino

BENGALURU/SYDNEY (Reuters) - 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 percent 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.

DEEP DISCOUNTING

Manufacturing growth was strong in Italy and, buoyed by rising demand at home and abroad, hit a three-month high in Germany. But in France activity contracted at the steepest rate in a year.

What will probably make particularly grim reading for ECB policymakers is the deep price cuts factories were again forced in to in order to drum up new business.

The survey’s output price index was 47.4, higher than March’s 47.1 but the second-lowest since early 2010.

Euro zone inflation again fell below zero last month as energy prices dropped.

Doubts about the effectiveness of the global monetary policy arsenal resurfaced last week when the Bank of Japan refrained from offering any hint of more stimulus, hitting stocks as the yen surged -- a trend that continued on Monday.

Industry was already struggling to recover from the April earthquakes that halted production in the southern manufacturing hub of Kumamoto, and the Markit/Nikkei Japan Manufacturing PMI fell to 48.2 from 49.1 in March.

In China, Sunday’s official PMI reading was barely positive at 50.1, a cold shower for those hoping fresh fiscal and monetary stimulus from Beijing would enable a speedy pick-up.

The findings were “a little bit disappointing”, Zhou Hao, senior emerging market economist at Commerzbank in Singapore, wrote in a note.

“...This hints that recent China enthusiasm has been a bit overpriced and the data improvement in March is short-lived.”

South Korea’s activity stabilize at 50.0, but it also reported demand from China was the worst in three months, with exports to its biggest market tumbling 18.4 percent on-year.

Additional reporting by Jessica Macy Yu and Sue-Lin Wong in BEIJING, Anu Bararia in BENGALURU, Christine Kim in SEOUL, Gavin Jones in ROME, Leigh Thomas in PARIS and Joseph Nasr in BERLIN; editing by John Stonestreet

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