Global slowdown fears grow as cost of living bites

The global economy looks increasingly likely to be heading into a serious slowdown, just as central banks aggressively reverse ultra-loose monetary policies adopted during the pandemic to support growth, data showed today.

In the eurozone, business activity contracted this month for the first time in well over a year while in Britain growth was at an 11-month low, purchasing managers' surveys said today.

Sister surveys due later from the United States are expected to show a slowdown in the world's largest economy, while Japan's government is expected to sharply cut its growth forecast for domestic growth.

Meanwhile, China's strict Covid-19 lockdowns and Russia's invasion of Ukraine have further damaged global supply chains that had not yet recovered from the pandemic.

"We've had a massive increase in global energy and food prices and that is hitting consumers' disposable income and forcing them to cut back," said Samuel Tombs at Pantheon Macroeconomics.

"It is quite a gradual deceleration however and we're not hurtling into a recession."

Eurozone business activity unexpectedly contracted this month due to an accelerating downturn in manufacturing and a near-stalling of service sector growth as burgeoning costs pushed consumers to cut back on expenditure, a survey showed.

S&P Global's flash Composite Purchasing Managers' Index (PMI), seen as a good gauge of overall economic health, fell to 49.4 in July from 52.0 in June, well below all forecasts in a Reuters poll that had predicted a more modest dip to 51.0.

A reading below 50 indicates a contraction and July's preliminary estimate was the lowest since February 2021.

Businesses across the eurozone continued to report mounting inflation pressures and an acceleration in wage growth, even as the overall growth outlook becomes increasingly murky, the European Central Bank said today, based on a survey of 71 major firms.

Inflation in the currency union was 8.6 percent last month, official data showed, and yesterday, the ECB raised interest rates by more than expected, confirming that concerns about runaway inflation now trump growth considerations.

The US Federal Reserve, battling 40-year high inflation, is forecast to deliver another hefty 75 basis point interest rate hike at its meeting next week.

The Reuters poll gave median predictions of a 40 percent probability of a US recession over the coming year and a 50 percent chance of one happening within two years, a significant upgrade from a survey last month.

China and Japan remain exceptions by keeping monetary policy loose, a sign their economies - the second- and third-largest in the world - lack the strength to offset weaknesses in other parts of the globe.

China slowdown

Worries over a global slowdown are casting a shadow over Asia's recovery prospects with factory activity growth slowing in Japan and Australia, keeping pressure on policymakers to support their economies while tightening monetary policy to combat inflation.

Japan's manufacturing activity grew at the slowest pace in 10 months in July, its PMI survey showed today, boding ill for an economy struggling to shake the wounds from the pandemic.

"July's PMIs suggest that the manufacturing sector is slowing as demand weakens, while the latest Covid-19 is starting to hit the services sector," said Marcel Thieliant, senior Japan economist at Capital Economics.

Factory activity also slowed in Australia with the index falling to 55.7 in July from 56.2 in June, a separate survey showed today.

China's economic growth slowed sharply in the second quarter, weighed by widespread Covid lockdowns and pointing to persistent pressure over the coming months from a darkening global outlook.

The slowdown in the world's second-largest economy, as well as the fallout from aggressive central bank tightening, forced the Asian Development Bank to slash its growth forecast for the region yesterday.

- Reuters