Worker Maria Robles sews clothes at the Karen Kane clothing company in Los Angeles, California on June 30, 2011.Lucy Nicholson/Reuters
The workshops of the world slowed down for a second consecutive month in June as factories in Europe and Asia reacted to tighter monetary policy at home and feeble consumer demand overseas.
The pace of growth in U.S. manufacturing, however, unexpectedly rose, easing fears that a double-dip recession is looming in the distance.
Globally, despite signs that supply chain disruptions caused by the earthquake and tsunami in Japan were finally relaxing, domestic austerity measures triggered by the continuing euro zone crisis and the threat of interest rate hikes in China took their toll.
"We are starting to see inflation rise in a lot of these emerging markets," said Alistair Bentley, an economist at TD. "As a result, the central banks are starting to tighten interest rates and I wouldn't be surprised to see activity and overall economic growth in some of these countries starting to decelerate."
Central banks have been unwinding ultra-loose monetary policy and hiking interest rates aggressively in Asia, hampering growth in the process.
In Europe, the central bank is expected to raise rates next week, having done so in April, and the U.S. Federal Reserve ended its $600-billion (U.S.) bond-buying stimulus program this week and has yet to offer any hints of more monetary easing to come.
"There is no doubt that the growth rate is slowing," said Peter Dixon, an economist at Commerzbank in London. "There is nothing in the offing suggesting a rebound – we are in for a few months of slower growth," he said.
But the U.S. provided one bright spot as the Institute for Supply Management's manufacturing index rose to 55.3 in June, from 53.5 the previous month. The increase, the first in four months, defied market expectations for a small decline in the index.
American markets reacted strongly to the manufacturing updates. The Dow Jones industrial average rose 1.36 per cent, the Standard & Poor's 500-stock index rose 1.44 per cent, and Nasdaq rose 1.53 per cent. The three indexes also recorded their best weekly percentage gains since July 2009.
Although the rebound in the ISM index suggests the U.S. has recovered from the negative effects of high oil and commodity prices and the March earthquake in Japan, economists warned that it was too early to celebrate a recovery.
"Part of it may just be a bit of volatility from month to month," Mr. Bentley said. "We've seen a fairly sharp slowdown in the U.S. over the past couple of months. The fact that today we saw a little bit of a rebound isn't really indicative of strong activity."
"The ISM index still paints a picture of an economy struggling to grow at anything more than lacklustre rates," added Paul Dales, senior U.S. economist at Capital Economics, in a research note. "And with a move towards fiscal consolidation looming, economic growth next year may be even weaker than this year."
Elsewhere there was little cause for optimism.
China's factory index fell in June to a 28-month low of 50.9, while the Markit Eurozone Manufacturing Purchasing Managers' Index slumped to 52.0 in June from 54.6 in May, an 18-month low.
France and the U.K. dropped to their lowest levels in 22 and 21 months, respectively, while German manufacturing expanded at the slowest pace in 17 months. Manufacturing in Italy, Ireland, Spain and Greece also all contracted in June.
With files from Reuters