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London/Tokyo: Soaring commodity costs are denting manufacturing activity in Asia and Europe and the outlook looks bleak as new orders drop off in the face of rising prices, surveys showed on Tuesday.
Manufacturing activity in the euro zone contracted in June for the first time in three years while business confidence in Asia's largest export markets is buckling and output has likely contracted further in the US.
Purchasing managers indices (PMI) showed manufacturing activity in the euro zone fell to 49.2 in June, China saw its index fall to a near three-year low of 52.0 while in Britain it contracted at its sharpest rate since December 2001.
The 50.0 mark separates growth from contraction. Factories worldwide have struggled in the face of soaring raw material and energy costs.
Tankan drops
Meanwhile, the Bank of Japan's tankan corporate index of big manufacturers' sentiment dropped to plus 5, from 11 in March, showing their mood has not been darker since 2003.
The picture of slowing growth and spiralling prices applied to Britain too. The UK's manufacturing sector saw output and new orders fall at their fastest rate in almost a decade. But there was no let-up in inflationary pressures with input costs and output prices both rising at the fastest rate since the series began.
Even Japanese manufacturers, which have long struggled to pass on costs, pushed up prices in the last quarter, although not fast enough to offset a rise in costs and to keep profits growing, data showed.
"That could indicate more inflationary pressures in the pipeline," said Magnus Prim, chief Asia currency strategist at SEB in Singapore.
"They're getting squeezed on the profit side and see no alternative but to pass on price increases."
The rally in commodity prices, driven in part by burgeoning demand from India and China, is feeding global inflation, threatening to push up low labour costs that for a decade helped keep a lid on prices.
To compound the gloom, unemployment has been rising in Spain, Italy and France.
Germany offered a rare ray of light yesterday. Retail sales rose strongly in May after a weak April, while unemployment fell fell in June to a near 16-year low of 3.266 million.
Policymakers elsewhere have tougher choices to make.
China and India are both battling their fastest inflation this decade.
Chinese firms warned that they were passing rising costs on to consumers, which could hurt demand, and struggling on export sales because of weak global markets, two PMI surveys showed.
The official purchasing managers' index, compiled by the China Federation of Logistics and Purchasing, fell to a nearly three-year low of 52.0 in June from 53.3 in May.
A separately published PMI from brokerage CLSA showed that output prices rose at their fastest pace in four years.
In India, purchasing managers were also worried about higher input costs.
The ABN Amro Bank PMI was a seasonally adjusted 58.6 in June, its highest reading since February and up from a 10-month low of 57.4 in May.
But the survey's input price index rose to a 19-month high and the rate of increase was the strongest since November 2006.
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