Global Soft Patch: China, U.S., Europe Activity Weak

Investor's Business Daily

The world's biggest economies are headed for a weak spring, sharp manufacturing slowdowns this month signal, possibly dragging on global growth for the rest of the year.

Markit's gauge on U.S. factory activity dropped 2.9 points to 52, missing forecasts for a smaller dip to 54.2 and falling by the most since June 2010.

Chinese manufacturing is nearing stagnation, with the research firm's index slipping 1.2 points to 50.5, barely indicating expansion. Export orders and employment shrank, signs of lower international and domestic demand.

Eurozone manufacturing contracted at a faster pace, led by Germany. Service sector activity in Europe's No. 1 economy hit a six-month low and swung back into negative territory, joining the slump at German factories.

U.S. stock indexes rallied anyway, helped by strong earnings from Netflix (NFLX) and others, though mild revenue gains by major industrials hinted at manufacturing weakness.

"It's just showing a very soft global economy, perhaps in need of more stimulus," said Andrew Grantham, a CIBC economist.

Massive central bank stimulus wasn't enough to prevent the latest soft patch. Low inflation is giving developed countries leeway to ease up on austerity and emerging economies room to spend more.

Growth now likely will start to pick up early next year, after the U.S. works through fiscal tightening and Europe finally exits recession, Grantham predicted.

China is unlikely to provide much of a jolt via government spending, after its big 2008 stimulus overheated the financial and real estate sectors.

Economic growth unexpectedly cooled to 7.7% in Q1 from 7.9% in Q4, and will likely stay below 8% for the full year as Beijing tries to limit inflation in property values, said Nicholas Lardy, a Peterson Institute for International Economics researcher.

China's property sector, much more than manufacturing, is the one to watch, he said, adding that an abrupt slowdown in real estate investment would significantly weaken the economy.

There's already a growing overhang of excess property, and household formation is cooling. The question is if real estate will see a gradual or dramatic retreat.

"I don't think the trend in the last few years will continue indefinitely," Lardy said.

Meantime, the eurozone's downturn should intensify, as the pace of deterioration in new orders accelerated for the third month in a row, Markit warned.

The data appeared to be bad enough to raise hopes that the European Central Bank will cut benchmark interest rates soon. London's FTSE 100 rose 2%, and Germany's DAX leapt 2.4%.

Germany's Q1 gross domestic product likely rebounded after shrinking in Q4, but Markit's data also dimmed the outlook for Europe's growth engine.

"The latest figures suggest any rebound in GDP over the first quarter could be rather short-lived, not least as the manufacturing and service sectors both recorded faster declines in new orders than one month earlier," said Tim Moore, senior economist at Markit, in a statement.

In the U.S., housing should continue to nudge the economy forward, partly offsetting tax hikes and budget cuts. Still, recent indicators suggest a new spring swoon may weigh on housing.

Existing-home sales have flattened recently on limited inven tory. March new-home sales rose 1.5% to an annualized 417,000, just below views for 419,000.

But homebuilder stocks were market leaders Tuesday.

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