EURO ZONE SLOW GROWTH MAY LEAD TO A NEW RECESION

In England:
Factory activity in the UK and the rest of Europe worsened sharply last month, triggering fresh fears of a double-dip recession. In Britain, manufacturing shrank at its fastest pace in more than two years as export orders plummeted. Growth in Germany's manufacturing sector until now the star performer in the western world and the engine of growth in the euro zone has almost ground to a halt while factory output in France, Italy and Spain is contracting. A closely watched monthly survey from Markit/CIPS showed the U.K. manufacturing headline index dipping to 49 in August from 49.4 in July. Export orders plunged, with the measure falling to 46.6 from 53.8. A number below 50 signals contraction. "The second half of 2011 has so far seen the UK manufacturing sector, once the pivotal cog in the economic recovery, switch into reverse gear," said Rob Dobson, senior economist at Markit. August saw production fall for the first time since May 2009 on the back of the sharpest deterioration in new orders for two-and-a-half years. There was also a slight drop in employment levels as manufacturers sought to cut costs. "The sudden and substantial drop in new export orders is particularly worrisome, with UK manufacturers hit by rising global economic uncertainty, just as austerity measures are ramping up at home. As consumer and business confidence are slumping both at home and abroad, it is hard to see where any near-term improvement in demand will spring from." Alan Clarke at Scotia Capital agreed. "The much hoped-for revival of manufacturing as an engine of growth for the wider economy has run out of juice." While manufacturing output in U.K. only accounts for 12.8% of GDP, it was very much the bright spot of the economy in 2010 and early 2011. By pointing to contracting manufacturing activity and easing price pressures, the survey not only reinforces belief that the Bank of England may very well keep interest rate down at 0.5% into 2013 but also fuels expectations that the bank may eventually turn to more quantitative easing. It is evident that manufacturers are now finding life really challenging as domestic demand is held back by serious headwinds notably including tightening fiscal policy and a major squeeze on consumers, while a slowdown global growth is limiting export orders. Meanwhile, although they have come off their highs, elevated input costs are still a problem for manufacturers. At least there was some good news on the inflation front for the Bank of England with the rise in output prices easing back to a nine-month low in August. This

suggests that manufacturers are finding it harder to raise prices as demand softens. Input prices rising at the slowest rate since December 2009 reduced pressure on companies to hike prices in August. It is notable that the further slowdown in UK manufacturing activity in August was replicated across Europe and also in several other countries. This indicates that the global manufacturing rebound from the sharp drop in output suffered during the 2008/9 recession is now faltering substantially.

The Continental Europe

The German economy grew by just 0.1% in the second quarter, even less than the UK at 0.2%. German manufacturing grew at the slowest pace in almost two years due to a sharp drop in new orders last month. Markit's purchasing managers' index fell for the fourth month in a row to 50.9 for August, the weakest level since September 2009 and compared with 52 in July. "Slower manufacturing growth mainly reflected the sharpest fall in new export orders since mid-2009," said Tim Moore, senior economist at Markit. "Heightened uncertainty about the global economic outlook and the escalating euro area debt crisis were cited as the main reasons why export clients put the brakes on spending in August." In France, the eurozone's second-largest economy, the picture was even worse the manufacturing sector contracted for the first time since July 2009. The PMI dropped to 49.1 in August from 50.5 in July, casting another shadow over France, which is already struggling with high unemployment, stagnant wages and weak consumer spending. Manufacturing in Italy, the eurozone's third-largest economy, shrank at its fastest rate in two years, with its PMI falling to 47 from 50.1. Spain's factory activity contracted for the fourth month in a row in August. Its PMI slipped to 45.3 from 45.6. "The eurozone manufacturing PMIs for August make bleak reading, with deterioration across virtually all countries and also across most components of the surveys," said Howard Archer, chief UK and European economist at IHS Global Insight. "Not only are the southern periphery eurozone countries and Ireland continuing to struggle markedly but there is also a sharp slowdown in manufacturing activity in the previously healthily performing core northern eurozone economies."

Over the ocean

On the other side of the Atlantic, US manufacturing is expected to have shrunk in August for the first time in two years. The Institute for Supply Management will release its monthly survey at 3pm BST London time. While China's manufacturing industry bounced back last month, a decline in export orders the first since April 2009 raised concerns. The breakdown of the data showed Italian, French and German

manufacturing PMIs all missed forecasts, helping to send the euro to the day's low against the Swiss franc, at 1.1525 francs. Commenting on the U.S. market and forthcoming data releases, BNP Paribas said that despite the relative calm of recent days, there is likely to be a price to pay for the turmoil of August and the recent loss of confidence in the recovery. "The intensification in downside risks to the outlook is one reason the Federal Open Market Committee has moved toward an easing stanceto shore up confidence and prevent it from becoming a self-fulfilling negative dynamic," BNP said. The Fed's rhetoric has had a calming effect on financial markets so far, the recent sense of normality will be challenged by data releases for August and September. "One challenge will come from an expected sub-50 reading on the manufacturing ISM for August. Another could come from the August employment report due out Friday," it said.

In Asia
In Asia, shares started September higher Thursday. Japan's Nikkei Stock Average added 1.2%, Australia's S&P/ASX 200 gained 0.5%, South Korea's Kospi Composite advanced 0.7%, Hong Kong's Hang Seng Index gained 1.5%, and the Shanghai Composite Index was down 0.2%. On the data front for August, China's official purchasing managers' index offered a mixed lead as it rose, for the first month since March, to 50.9 from 50.7 in July. While the rise will likely alleviate concerns about an economic slowdown on the mainland, the input-prices sub index also rose, signaling inflation pressure has persisted and could likely spur Beijing to keep a tighter monetary policy. Date: 03/09/2011

Mircea Halaciuga, Esq. 0040724581078 Financial news - Eastern Europe