manufacturing industry

China’s factories power ahead, inflation ticks up in Europe


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China’s factories power ahead, inflation ticks up in Europe

FACTORY. Employees work on a production line manufacturing mechanical parts at a factory of SMC Corporation during an organized media tour, in Beijing, China, January 10, 2023.

Tingshu Wang/Reuters

It remains unclear how a strong Chinese recovery could ultimately feed into prices elsewhere

China’s factory sector grew in February at the fastest pace in more than a decade in a boost for global economy recovery hopes, while data across Europe underlined that inflation in the region was still not under control.

Adding to evidence that activity is rebounding in China after the removal of strict COVID-19 curbs, its manufacturing purchasing managers’ index (PMI) released on Wednesday, March 1, climbed to 52.6 last month against 50.1 in January, while a private sector survey also showed growth for the first time in seven months.

“China’s PMIs beat market expectations across the board, propelled by the reopening after dropping COVID restrictions and the resumption of activity after the Lunar New Year holiday,” said Duncan Wrigley at Pantheon Macroeconomics.

“This is an encouraging set of data, but still is only one month, and challenges remain.”

Asian stocks bounced off a two-month low and headed for their best day in seven weeks on Wednesday. Global oil prices went higher, underlining how a strong Chinese recovery could fuel global inflation through increased energy demand.

It remains unclear how a strong Chinese recovery could ultimately feed into prices elsewhere, as the inflationary impact of its higher energy demand could be offset by the extra supply of goods it brings to the world’s economy.

Stubborn inflation

In Europe, German data showed the fight against inflation still has some way to go. Prices in the region’s largest economy rose 9.3% year-on-year in February, beating analyst expectations of a rise of 9% and higher than January’s 9.2% increase.

That came after readings earlier this week showed prices rising faster than expected in France and Spain, challenging the view that inflation in the region had clearly peaked.

“The interest rate step announced for March will not be the last,” Bundesbank President Joachim Nagel said of the European Central Bank’s strongly flagged intention to raise rates by a further 50 basis points this month across the euro area.

“Further significant interest rate steps might even be necessary afterwards, too,” he added.

Separately, S&P Global’s headline factory PMI for the euro area slipped to 48.5 from 48.8, but the output index – which feeds into a composite PMI due on Friday, March 3, and seen as a good gauge of overall economic health – climbed to 50.1 from 48.9.

“The brighter production picture first and foremost reflects a broad-based improvement in supply chains, with deliveries of inputs into factories quickening on average to a degree not seen since 2009,” said Chris Williamson, chief business economist at S&P Global.

Outside the euro area, British manufacturing activity shrank last month but at the slowest pace since July and factories were more optimistic as the threat of a deep recession eases.

Asian strain

India and Australia saw economic growth slow in the quarter to December, and South Korea’s exports fell in February for a fifth straight month, highlighting the pain slowing global demand was inflicting on the region’s manufacturers.

The region’s weaker data underscores the challenge Asian policymakers face in reining in inflation with higher interest rates, without choking off economic recoveries already facing pressure from the global economic slowdown.

China’s recovering economy, the world’s second largest, may not be enough to offset headwinds from weak chip demand and supply constraints for export-reliant economies such as Japan.

Japan’s final au Jibun Bank PMI fell to 47.7 in February from 48.9, dropping at the fastest pace in more than two years.

That followed data showing a big drop in Japan’s factory output in January on slumping production of cars and semiconductor equipment, casting doubt on the Bank of Japan’s view the economy was on course for a steady recovery.

Factory activity continued to shrink in Taiwan and Malaysia in February, and expanded at a slower pace in the Philippines, surveys showed.

India’s manufacturing activity expanded at the slowest pace in four months in February, but remained relatively strong amid buoyant domestic demand, its PMI survey showed.

Separate data showed South Korea’s exports fell 7.5% in February from a year earlier, marking the fifth straight month of declines, partly due to a plunge in semiconductor exports. –

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