Glimpses of a China glow, of US wisdom

As Australia's beleaguered manufacturing sector takes another sharp downturn, there is hope on the economic horizon as China arrests its slowdown and the US buys itself some much-needed time.

Amidst the manufacturing gloom emerging within the region there was a tiny ray of sunlight. It appears China may have arrested its economic contraction.

That may not provide much solace for beleaguered Australian manufacturers, with the steep fall in the Australian Industry Group/PwC PMI indicative of the difficult conditions being experienced by local manufacturers as costs continue to rise against a backdrop of weak demand and intense competition.

The continuing strength of the Australian dollar despite the fall in commodity prices this year is a significant factor in the condition of the sector and the recent spike in its value which has again pushed it above 105 US cents offers no relief.

That manufacturing is under pressure isn’t new news, given the spate of company collapses and the rapidly rising level of job losses in the sector, but the fall in the index in July, from 47.2 to a three-year low of 40.3, represents a sharp downturn. An index reading below 50 represents a contraction in activity.

AIG is predicting further falls in the months ahead, citing another drop in new orders, still rising labour costs and the yet-to-be-felt impact of the carbon tax.

Australian manufacturers aren’t alone in feeling the impact of difficult global conditions. Japan, South Korea and Taiwan have all reported falling exports and economic activity as the impacts of the European crisis, the weakness of the US economy and the slowing of China’s economic growth rate this year have worsened and spread.

Even India this week lowered its forecast growth rate for the year to March from 7.3 per cent to 6.5 per cent, blaming the increased integration of the Indian economy with the rest of the world for the revision.

Export-oriented economies are inevitably going to be harmed by the woes within the largest of the developed economies.

There was, however, some mildly positive news that could offer some faint hope that conditions might stabilise.

China’s official PMI was out today and, while fractionally below the June reading of 50.2 and below expectations, the index, at 50.1, at least remained in positive territory. That could signal that the increasingly intense efforts of the Chinese authorities to arrest the slowdown in their economy might be starting to gain some traction.

China has lowered its banks’ reserve requirements, cut interest rates and begun stimulating infrastructure investment in an attempt to end the slide in its growth rate, which slowed to what is by China’s standards a weak 7.6 per cent in the June quarter.

For the other Asian economies, and the Australian resources sector, a lot is riding on China’s ability to arrest the slowdown and return growth to around the 8 per cent level which is regarded as the minimum required for economic and political stability.

In the US, where the Fed is meeting amid speculation that it will embark on QE3, there was also a glimmer of better news.

There are reports that Congress is close to agreeing to a short-term deal on spending that will push the 'fiscal cliff' the US economy was facing in January – when automatic spending cuts and tax increases were scheduled to hit a very vulnerable economy – out by six months. That would give the US time to thrash out a more permanent solution and avoid the near-certainty that the fiscal cliff would force its economy back into recession.

Also in the US, the Chicago PMI rose for the first time in three months, to 53.7 from 52.9, defying expectations of a fall. While not a major indicator it apparently does provide some guidance to broader manufacturing conditions and therefore the rise is being interpreted as mildly positive.

If there is to be a meaningful turnaround in global conditions there will need to be stronger growth in the US, perhaps with some help from the Fed, and more importantly some stabilisation of the teetering eurozone, where the European Central Bank will meet tomorrow and Mario Draghi’s ‘’whatever it takes’’ promise will be tested.

Inaction from that meeting will be unequivocally bad news for a global economy that is already in an increasingly weak condition.

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