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Global Economy

Global Economy at its Lowest Pace

-America’s Service Sector Contracts for First Time Since 2013
– Brazil Slumps at Even Faster Pace
– China Manufacturing Services Slowdown
– Eurozone Business Sees Worst Month in a Year

Global economy-business activity had endured its worst rate in over three years in February in spite of firms cutting prices for the first time since September, business surveys reported on Thursday. Euro zone businesses had their worst month in over a year, the U.S. service sector decelerated for the first time since October 2013, while China’s service sector growth slowed.

Thursday’s downbeat surveys come only days after reports showed manufacturing output across much of Asia shrank in February. Noting that growth also faded all through Europe and the United State.

David Hensley, a director at JPMorgan stated that “February’s PMI surveys further highlight the broad-based weakness in global growth during the opening quarter of 2016”. Noting that “From January through February, JPMorgan’s Global All-Industry Output Index, produced with private data vendor Markit, fell to 50.6 from 52.6, which marks its lowest reading since October 2012 when it reached above the 50 mark that divides growth from contraction. On the other side a purchasing managers index (PMI) covering the global service industry dropped to a 40-month low of 50.7 from 52.8.

America’s Service Sector Contracts for First Time Since 2013.United State also has been affected by the drift, as private data vendor Markit said its service sector purchasing managers index (PMI) fell to 49.7 in February from 53.2 in January and is now below the 50 level that separates growth from contraction for the first time since October 2013.

Markit’s composite index of both manufacturing and service sector activity fell to 50.0 from 53.2 in January.

An alternative reading from the U.S. Institute of Supply Management (ISM) showed service sector activity still growing in February, but at a slower pace and employment in the sector declined for the first time in two years.

ISM said its index of non-manufacturing activity fell to 53.4 from 53.5 the month before, while the employment index fell to 49.7 from 52.1 a month earlier, marking the first fall in service-sector employment since February 2014.

Euro beats off the U.S. dollar sharply on Thursday after data showed a decline in U.S. service sector employment. Thus Jason Leinwand, managing director at Riverside Risk Advisors in New York said that the data is literally weak enough to raise market concerns and add that “The market is definitely leaning away more and more from the prospects of a Fed hike this year.” From its side, the U.S. Federal Reserve raised interest rates for the first time in a decade in December, however is not likely to raise rates over again at its March policy meeting.

Brazil Slumps at Even Faster Pace

Latin America’s largest economy that exists in the activity of the service sector of Brazil dropped in February at a pace never recorded as fast before, in regard of a survey by HSBC/Markit, by the time Brazil suffers from its worst economic crisis in over a century. While the HSBC/Markit service sector PMI Brazil fell to 36.9 in February from 44.4 in January.

“The Brazilian economic downturn took a real turn for the worse in February,” said Rob Dobson, a senior economist at Markit. “The labor market also appears to be in dire straits, as manufacturers and service providers reported further substantial reductions to headcounts.” The deeper contraction in services, along with an accelerating decline among manufacturers, dragged Markit’s composite Brazil index to 39.0 in February from 45.1 in January. Brazil’s gross domestic product shrank 3.8 percent in 2015, capped by another steep contraction in the fourth quarter, according to statistics agency IBGE on Thursday.

China Manufacturing Services Slowdown

Growth in China’s services activity slowed in February, adding to risks for policymakers in Beijing who are counting on robust growth in the sector to offset a planned overhaul of bloated state companies.
The Caixin/Markit PMI fell to 51.2 in February from a six-month high of 52.4 in January.
But a composite Caixin output index covering both manufacturing and services fell below the 50-point level in February, suggesting weakness in the manufacturing sector was overcoming the contribution from the services sector.

“Further government measures were need to boosted the services sector and improve balance in the economy”, said He Fan, chief economist at Caixin Insight Group. The latter added that “While implementing measures to stabilise economic growth, the government needs to push forward reform on the supply side in the services sector to release its potential”.

China is expecting to lay off 1.8 million workers in the coal and steel industries, or about 15 percent of the workforce, as part of efforts to diminish a capacity glut, however no timeframe was given. In addition to the aforementioned, it is expected from China to lay off 5-6 million state workers to curb industrial overcapacity and pollution, in two three years ahead.
China’s central bank injected an estimated $100 billion worth of long-term cash into the banking system on Tuesday.

Japan’s services sector activity witnessed its lowest rate of expansion in seven months as new business weakened. Noting that the Markit/Nikkei Japan services PMI fell to 51.2 from 52.4 in January, and is now at the lowest since July last year.

Eurozone Business Sees Worst Month in a Year

Euro zone businesses had their worst month in over a year in February which, coupled with further signs of deflationary pressures, is likely to solidify expectations for further monetary policy easing.
Markit’s euro zone composite PMI, seen as a good guide to economic growth, fell to 53.0 last month from January’s 53.6, its lowest reading since the start of 2015, but was still over the 50 mark that denotes growth.

Chris Williamson, chief economist at Markit stated that “The slowdown in growth of business activity, accompanied by a similar easing in the pace of job creation and the steepest fall in prices charged for a year, suggest that the region’s recovery is losing momentum” . Another cut in the already-negative deposit rate is likely when the ECB meets on March 10. A Thursday Reuters poll gave a 60 percent chance the central bank would also expand its bond-buying programme from 60 billion euros a month.

Brexit Fears Hit Boardrooms

The Markit/CIPS UK services purchasing managers’ index slumped to 52.7 from 55.6 in January, the weakest reading since March 2013. The news halted sterling’s recovery against the U.S. dollar over the last few days, following last week’s Brexit-driven sell-off. The prospect of Britain voting to leave the European Union at a referendum in June sent shivers through the boardrooms of the country’s dominant services sector last month, sending growth to a three-year low.

Markit’s Chris Williamson said that “Survey responses reveal that firms are worried about signs of faltering demand, but boardrooms have also become unsettled by concerns regarding the increased risk of Brexit, financial market volatility and weak economic growth at home and abroad”.

British gross domestic product now is expected to expand by only 0.3 percent in the first quarter of 2016, according to Markit, a slowdown from 0.5 percent in the final three months of 2015 and its poorest performance since late 2012.

The Bank of England was once expected to be the first major central bank to tighten policy however now it is not expected to act until the end of the year, and Thursday’s readings may push the forecasts even further out.

Asharq Al-Awsat English

Asharq Al-Awsat English

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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