October world factory activity expands slowly, stimulus still needed

By Jonathan Cable, Wayne Cole and Dan Burns LONDON/SYDNEY/NEW YORK (Reuters) - Global manufacturing activity increased last month at the same modest pace as in September, suggesting the need for continued economic policy stimulus, especially in Europe.JPMorgan's Global Manufacturing Purchasing Managers' Index, produced with Markit, held steady at 52.2 in October. But it was one of the lowest readings this year, suggesting factory activity is expanding slowly. "The global PMI continues to signal 3-4 percent annualized gains in manufacturing output as we head toward year-end," said David Hensley, a director at JPMorgan. The index combines survey data from countries including the United States, Japan, Germany, France, Britain, China and Russia. ASIA SLOWS, LED BY CHINA Regional manufacturing surveys from Asia were littered with unwelcome landmarks, including a five-month low for activity in China, a four-month trough for South Korea and a 14-month low for Indonesia. Chinese factory activity unexpectedly fell to a five-month low in October, reinforcing views that the country's economic growth is slowing. The official Chinese Purchasing Managers' Index eased to 50.8 in October from September's 51.1, the National Bureau of Statistics said on Saturday. A private Chinese factory survey by HSBC/Markit on Monday showed its manufacturing PMI edged up to 50.4 in October, from September's reading of 50.2. Though overall growth picked up slightly, growth in new orders and new export orders, proxies for domestic and foreign demand, fell to their lowest in four to five months. "There remains downward pressure on the economy, and monetary policy will remain easy," economists at China International Capital Corp said in a note to clients after the data. It has been a tough year for China's economy. Growth fell to 7.3 percent in the third quarter, its lowest level since the 2008 global financial crisis, as the housing market sagged and domestic demand and investment flagged. The cooldown is expected to be China's worst in 24 years this year, according to a Reuters poll. To encourage more growth, China has cut taxes, quickened some investment projects, lent short-term loans to banks, instructed local governments to spend their budgets and reduced the level of deposits some banks hold as reserves to spur lending. "Sentiment has slightly deteriorated on the back of the Chinese PMI. Overall, the data is disappointing," Credit Agricole economists said in a note to clients. A rare bright spot was India, where the HSBC PMI rose to 51.6 in October, from 51.0 in September, extending its run above 50 to a full year. Readings on Japanese activity were delayed by a holiday but will likely be overshadowed by the Bank of Japan's decision on Friday to further expand its massive bond buying program to stimulate the economy. EUROPE IN THE DOLDRUMS Euro zone manufacturing activity expanded at a slightly faster pace in October, but only tepid expansion in Germany and contractions in France and Italy will be disconcerting for the European Central Bank as it battles to prevent deflation. Some form of quantitative easing, or buying of government or corporate bonds, is one of the last policy options the ECB has left to fight deflation risks and rekindle economic growth in the monetary union. Markit's final October manufacturing PMI for the euro zone was 50.6, beating September's 50.3 but shy of an earlier flash estimate of 50.7. "The performance of euro zone manufacturing remained broadly flat at the start of the final quarter," said Rob Dobson, senior economist at Markit. "Manufacturing is therefore unlikely to provide any meaningful boost to the currency union's anemic GDP growth." Germany's manufacturing industry returned to modest growth last month but new business fell slightly for a second month as Russian sanctions and a general economic slowdown weighed on demand. Adding to the gloom, the surveys showed French factory activity contracted more quickly than in September, while Italian manufacturing slowed at the sharpest rate in 17 months. Outside the euro zone, British factories reported activity expanded at the fastest rate in three months in October. But weak demand from the euro zone, its main trading partner, sent export orders tumbling at the fastest pace since January 2013. AMERICAS Across the Atlantic, the manufacturing picture was also mixed in October, with U.S. factory activity slowing in the Markit PMI survey but expanding at its fastest growth rate in three and a half years, according to the Institute for Supply Management. Private data vendor Markit said its final U.S. October PMI fell to 55.9 from 57.5 in September. "The latest figures indicate that the recovery has lost some intensity at the start of the fourth quarter, reflecting subdued export demand from the euro area and key emerging markets," said Tim Moore, senior economist at Markit. However, ISM said its index of U.S. factory activity rose to 59 in October from 56.6 in September, bringing the index back to the same level it recorded in August, which was the highest since March 2011. "The overall growth outlook remains very resilient as the underlying strength in domestic demand clearly outweighs potential external headwinds," said Harm Bandholz, chief U.S. economist at UniCredit Research. Manufacturing sectors in Canada and Mexico, whose economies are linked to the U.S. market, both did well in October. The RBC/Markit Canadian PMI rose to a seasonally adjusted 55.3 last month from 53.5 in September, the highest reading since November 2013. "We saw a strong uptick in Canada's manufacturing business conditions in October driven by new order growth," said Craig Wright, senior vice-president and chief economist at RBC. Mexico's HSBC/Markit PMI rose to 53.3 in October, after adjusting for seasonal variation, from 52.6 in September, a nine-month high. Mexico exports mostly manufactured goods and sends nearly 80 percent of its exports to the United States. Analysts expect the economy to expand by about 2.5 percent this year, with growth picking up after a weak start to the year. However, activity in Brazil's manufacturing sector declined for a second straight month in October. The HSBC/Markit Purchasing Managers' Index for Brazil's manufacturing sector dropped to 49.1 in October from 49.3 in September in seasonally adjusted terms. It was the sixth decline in the past seven months. Brazilian manufacturers have struggled for years with high interest rates, scarce labor and burdensome taxes. Ahead of the re-election of President Dilma Rousseff in October, the country endured a mild economic recession in the first half of the year. (Editing by Toby Chopra, Clive McKeef and Dan Grebler)