LONDON/TOKYO: Manufacturing activity across Europe and Asia contracted again last month, underscoring the fragility of the global economic recovery, although factories in the euro zone at least may have passed the trough, surveys showed on Wednesday.
Price pressures slackened and the fall in demand moderated in the 20 countries sharing the euro, driving a surge in optimism. The bloc eked out growth in the final three months of 2022, managing to avoid a recession, official data showed on Tuesday.
S&P Global's final manufacturing Purchasing Managers' Index (PMI) climbed to a five-month high of 48.8 in January from December's 47.8, in line with a preliminary reading but still below the 50 mark separating growth from contraction.
"We think in general the worst is now past for both inflation and the activity front. The activity is not softening, it is going back up, so expectations are for a rebound," said Mateusz Urban, Senior Economist at Oxford Economics.
Manufacturers in Germany, Europe's largest economy, started 2023 with a slightly brighter outlook on the year ahead despite demand continuing to fall as inflation and supply chain problems eased.
In France, the bloc's second-biggest economy, factory activity returned to growth albeit not as strongly as initially forecast.
But British manufacturing business shrank for a sixth month in a row in January, kicking off a tough 2023 when the country's economy looks set to fall into a recession.
Easing price pressures will however be welcomed by central bank policymakers. Soaring inflation - initially described as transient - has proved far more sticky than thought and prompted aggressive monetary tightening.
The U.S. Federal Reserve looks set to hike borrowing costs by 25 basis points later on Wednesday, a Reuters poll found. The European Central Bank and the Bank of England are both expected to add 50 basis points on Thursday, separate Reuters polls found.
Euro zone inflation eased for the third straight month in January but relief may be limited as underlying price growth held steady, official data showed on Wednesday.
In Asia, factory activity contracted in January as the boost from China's COVID reopening had yet to take full effect.
China's factory activity shrank more slowly in January after Beijing lifted tough COVID curbs late last year, a private sector survey showed.
China's Caixin/S&P Global manufacturing purchasing managers' index (PMI) nudged up to 49.2 in January from 49.0 in December, staying below the 50 mark for a sixth straight month.
The data contrasted with a better-than-expected official PMI survey issued on Tuesday. But whereas the official PMI largely focuses on big and state-owned Chinese businesses, the Caixin survey centers on small firms and coastal regions.
Softening input-price pressures also offered initial positive signs for Asia, with the pace of contraction in output slowing in Japan and South Korea, the surveys showed.
But there is uncertainty about whether the region can weather the hit from slowing global demand and stubbornly high inflation, some analysts say.
"The worst of Asia's downturn is behind, but the outlook is clouded by weaknesses in major export destinations like the United States and Europe," said Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo.
"With the recovery from COVID-19 under way, Asian economies need a new growth engine. There isn't one so far."
Factory activity expanded in January in Indonesia and the Philippines but shrank in Malaysia and Taiwan, PMI surveys showed. India's manufacturing industry started the year on a weaker note, expanding at the slowest pace in three months.
The International Monetary Fund on Tuesday slightly raised its 2023 global growth outlook on "surprisingly resilient" demand in the United States and Europe and the reopening of China's economy after Beijing abandoned its strict pandemic controls.
But the IMF said global growth would still slow to 2.9% in 2023 from 3.4% in 2022, and it warned the world could easily tip into recession. (Reporting by Jonathan Cable and Leika Kihara; Editing by Bradley Perrett and Christina Fincher)