Signs of Global Slowdown Persist

July 27, 2015Economicsby EW News Desk Team

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Signs of a global slowdown in economic activity persist as commodities prices fall, fears of debt defaults rise, and China shows weak manufacturing data.

The purchasing manager index for China’s manufacturing sector fell to its lowest point in over a year, as the Markit PMI dropped to 48.2, indicating a continuance of the year’s trend of a contracting manufacturing sector. One analyst called the data “big, bad news” after the release on Friday, with some analysts warning that a decline in activity could cause the Chinese stock market, which has seen a brief reversal from its bullish trend earlier this year, to resume falling in value.

A decline in Chinese equities is widely seen as a serious risk to domestic demand in Asia’s largest economy, as the government attempts to spur domestic consumption and encourage more Chinese to purchase more goods and services. The government has encouraged more spending through lower interest rates and lax lending regulations, and economists believe the wealth effect from an improving economy has also helped the country see its domestic demand rise in early 2015.

The country’s GDP rose by an annualized 7% in both the first and second quarter of 2015, although a larger share of that growth is attributable to the financial services sector. Some estimates suggest that Chinese GDP growth would be closer to 6% after discounting all of the gains from the surging stock market in early 2015 from the figures.

China’s falling manufacturing activity, which was far below expectations of positive manufacturing growth, indicates that the country’s recent attempts to pull up activity are lagging, and even if it succeeds in spurring local demand, that may not help the country’s large manufacturing industry. The country could also be showing signs of losing competitiveness to emerging manufacturing nations like Vietnam.

Weak European Growth

European activity showed more strength, as Markit’s flash PMI for the Eurozone showed growth of 53.7, slightly below expectations but still solidly above the breakeven point, indicating growing activity. The factory PMI, which measures manufacturing, fell only 0.3 points to 52.2, suggesting that productivity and exports remain in reasonable shape despite the continent’s dramatic troubles with Greece’s debt load.

Nonetheless, critics have noted that European demand has been largely—and artificially—supported by massive monetary stimulus, as the Eurozone has seen the European Central Bank continually buy over 1 trillion euros' worth of government bonds throughout the region. This has effectively freed up liquidity for more investment activity, ultimately driving many sorts of private investment and consumption.

Even with this quantitative easing program, the Eurozone has posted relatively anemic GDP growth, and the euro has lost over 9% of its value versus the dollar at the same time.