STORM CLOUDS GATHER OVER THE ECONOMY

 
Julian Harris
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■ Slowest US and UK factory activity since September 2009

■ Inflation pressures start to feed through into British wages

■ Yields on 10-year US government bonds fall to three per cent

STORM clouds gathered over the global economy yesterday, as a raft of gloomy data poured doubt on the strength of the UK and world recovery.

Yields on 10-year US government bonds sank below three per cent for the first time in over six months, after growth in factory activity slowed to its most sluggish rate since September 2009, and American jobs figures proved desperately disappointing.

The Dow also reacted badly, shedding 279.65 points – its biggest one-day loss in a year.

In the UK, manufacturing activity in May recorded its slowest growth since September 2009, hammering the pound.

“Sterling has taken a major hit, dropping by almost a cent against the US dollar, and by half a cent against the euro,” commented Richard Driver of Caxton FX.

The UK’s economic weakness is today compounded by signs of second-round inflationary effects, with private pay settlements hitting three per cent according to Incomes Data Services.

One in ten pay settlements in the commercial sector are resulting in raises of more than four per cent, the data showed.

Inflation is running at 4.5 per cent on the CPI measure, over twice the target rate. Sluggish growth and spiralling inflation are piling greater pressure on the Bank of England, and chancellor George Osborne.

“The disappointing set of figures is further evidence that last year’s economic recovery is stalling,” said Labour MP Angela Eagle.

The UK factory figures came “against a darkening global backdrop, with energy prices stubbornly high and global manufacturing output beginning to look somewhat shakier,” according to Mark Lee of Barclays Corporate.

Output for British factories fell to 49.9 in Markit’s purchasing managers’ index (PMI) for May, while the headline rate dropped to 52.1 – down nearly 10 points since the beginning of the year. Figures below 50 indicate economic contraction.

Mortgage approvals fell further in April, the Bank of England announced, down to 45,166 in April, from 47,145 in March.

And confidence among UK businesses slipped back in May, after April’s bounce, a business barometer by Lloyds revealed.

Manufacturing in the US sank to a PMI reading of 53.5 in May according to ISM, while an ADP survey showed private sector job growth of just 38,000 – massively below expectations for 175,000 new jobs.

Factory activity across the Eurozone also dipped to a seven-month PMI low of 54.6, while a separate PMI survey reflected a slowdown in the Chinese manufacturing – down to 52, from 52.9 in April.

Meanwhile the Australian economy shrank by 1.2 per cent in the first-quarter of the year, hit by floods and cyclones.