Global Manufacturing Weakens Further In August, More Easing Probably Won’t Spur Growth

The global manufacturing purchasing managers' index slipped from 48.4 in July to 48.1 in August. This is its lowest level since June 2009 and is consistent with global GDP growth of lower than 2 percent on a quarter-on-quarter annualized basis -- a rate which would be well below the long run trend growth rate of 3.7 percent per annum since year 2000.

Gross domestic product is likely to contract in the euro zone in the third quarter, while growth in the U.S. is below trend and China's economy is failing to respond to policy stimulus.

New orders dwindled in the euro zone, suggesting the outlook for the 17-nation economy remains poor, while activity in China's manufacturing sector-the engine for much of Asia's economy-shrank at the fastest pace since the depth of the global financial crisis. Meanwhile, factory activity in the U.S. fell to the lowest level seen since the recession ended in the summer of 2009.

Against this backdrop, economists expect the major central banks to unveil a policy response in the coming months with the European Central Bank likely to announce some further support for the economy this week, the Federal Reserve set to launch a fresh round of quantitative easing, or QE3, next week and the People's Bank of China due to cut its reserve ratio by 150 basis points by year-end.

However, Capital Economics Senior Global Economist Andrew Kenningham said that he remains skeptical whether further monetary stimulus will have much impact on economic activity, particularly in the advanced economies.

The industrial slowdown which began in the second quarter has accelerated and is affecting advanced and emerging economies alike.

China excavator maker Sany Heavy Industry Co. Ltd. (SHA: 600031) missed forecasts with a 28 percent fall in second-quarter net profit, its biggest quarterly profit drop since 2008. Sany, which competes with Caterpillar Inc. (NYSE:CAT), has been looking to expand abroad to add to its business at home.

The slowdown in China has even prompted global leader Caterpillar to start exporting Chinese-made machinery to the Middle East and Africa.

Back in March, when Chinese Premier Wen Jiabao cut this year's economic growth target to 7.5 percent from an 8 percent goal in place since 2005, most economists assumed he was being unduly modest and that the world's second-largest economy would actually expand much faster, like it always did.

Over the past decade, the Chinese economy has consistently outperformed annual targets -- averaging close to 11 percent growth -- despite the 2008-09 global financial crisis.

But with the economy cooling much more than expected in recent months the 7.5 percent target is starting to look ambitious.

Two complementary surveys showed china's manufacturing sector has been badly hit by slowing new orders as demand falters, particularly from the euro zone.

The final reading of the HSBC China manufacturing purchasing managers' index (PMI) for August fell to a seasonally adjusted 47.6, its lowest level since March 2009, down from 49.3 in July and slightly below a flash reading of the index late last month.

A number below 50 indicates contraction, while above 50 indicates expansion. The figure followed an official manufacturing PMI on Saturday that signaled a contraction for the first time since November. It had been forecast to stay roughly level with July's 50.1 reading.

The numbers triggered new calls for an urgent policy response, with HSBC's Chief China Economist Qu Hongbin saying, "Beijing must step up policy easing to stabilize growth and foster job market conditions."

This week, President Hu Jintao is slated to give a speech on the state of China's economy at a meeting of leaders of the Asia-Pacific Economic Cooperation (APEC) forum in Russia. According to a report from the official Xinhua News Agency, he will propose building more infrastructure to generate growth.

Beijing has cut interest rates twice since early June and is pumping money into the economy through higher investment by state companies. But the long list of disappointing data that came of China in recent months have raised concerns that the policies implemented so far have failed to arrest a cyclical economic downturn and whether more stimulus measures will do the trick.

In the 17-nation euro zone, the manufacturing PMI remained below 50 for a 13th month, though the contraction was less deep than in July. The August index was 45.1, compared with 44 in July. However, new orders for German exports, the driving force of the country's economy, suffered their steepest retreat since April 2009, underscoring the vulnerability of the economy to global stagnation. A weaker German economy could curb the country's willingness to bankroll future euro zone rescue efforts.

Markit's data showed manufacturing activity also fell month-to-month in France, Spain and Greece in August -- albeit at a slower pace. The decline steepened in Italy.

The gloomy economic indicators could persuade the European Central Bank as soon as this Thursday to take action, such as cutting its benchmark interest rate or setting out plans to buy the government bonds of weaker member states, including Spain.

Things aren't looking any better in the U.S.

The decline in the ISM manufacturing index to 49.6 in August, from 49.8 in July, was very modest, but it was nevertheless enough to push it down to the lowest level seen since the recession ended in the summer of 2009.

"August's ISM manufacturing index gives the Fed another green light to launch QE3 next week," Paul Dales, senior U.S. economist at Capital Economics, wrote in a note. "Such action is warranted, but it won't dramatically alter the economic landscape."

The U.S. survey is consistent with Federal Reserve Chairman Ben Bernanke's view that the U.S. economic situation is "far from satisfactory."

In his speech to an annual Fed conference in Jackson Hole, Wyo., Bernanke sent a clear message that the central bank will do more to help the still-struggling U.S. economy. Some economists predict the Fed will unveil some bold new step as soon as its Sept. 12-13 meeting, possibly QE3.

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