US and Japan factories gain from Europe’s pain

  • Business
  • Thursday, 03 Jul 2003

NEW YORK: Factory activity in the United States and Japan improved in June while Europe’s manufacturers suffered a deeper contraction, the latest surveys showed, underscoring how the euro’s export-choking rise against major currencies has brought yet more pain to the euro zone economy. 

Manufacturers in the world’s three biggest economies are scrabbling to find sources of growth but economists say conditions are ripe outside Europe for an improvement. 

Newly released data showed the US factory sector, although contracting slightly for a fourth month, was poised to accelerate as lean inventory shelves and growing piles of new orders spurred a healthier expansion, economists said. 

That could help drive a global recovery, with Japan’s factory sector perking up and eking out growth. The country’s latest tankan survey showed confidence among manufacturers had jumped to its highest level in more than two years. 

“Interest rates are low and a lot of the adjustments to excess investment or other problems have been worked through. Everywhere output is below potential, so that naturally puts some upward pressure on output,” said Ram Bhagavatula, the chief economist at Royal Bank of Scotland Financial Markets here. 

The euro’s hefty rise has hurt European factory exports to the benefit of cheaper US, Japanese and British goods. British manufacturing has risen to its highest level of the year, close to the dividing line between growth and contraction. 

“Euro strength is having a much more broad-based impact on European industry than many people might have anticipated six or nine months ago,” said Robert Lind at ABN Amro in London. 

With activity at European factories shrinking at a faster pace, analysts said the European Central Bank (ECB) would face more pressure to cut interest rates again after a half-point reduction in June. 

In the United States, the Institute for Supply Management (ISM) said its national factory gauge rose to 49.8 in June from 49.4 in May, failing to break above the 50 level that divides growth from contraction. The index showed a fourth straight month of shrinking output and was below forecasts for a rise to 51. 

But its components painted a rosier picture. A surprise drop in inventories means factories are likely to rev up output more aggressively if demand picks up. New orders grew at a faster rate, rising to 52.2 from 51.9. 

Across the Atlantic, the main euro zone manufacturing index slid further below 50, to 46.4 in June from 46.8 in May. 

NTC Research, which compiles the European and Japanese surveys for Reuters, said euro zone activity was dragged down by a drop in orders chiefly due to the recent strength of the euro against the US dollar. 

The euro has eased back to around US$1.15 in the past two weeks, but the damage has already been done to exports by a surge above US$1.18 in May from around US$1 last December. – Reuters  

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