Manufacturing declines in Japan, Europe, too

— -- Factories throughout the developed world are producing fewer goods, raising the specter of a worldwide recession.

A J.P. Morgan survey of purchasing managers released Wednesday showed an accelerating slowdown of manufacturing in the United States, Europe and Japan. Developing economies such as China and India continue to expand, but also are slowing from more robust growth rates, the report said.

"It feels like the bottom's fallen out," said David Hensley, an economist at J.P. Morgan.

Separate reports from Europe, the United Kingdom, Japan and the U.S. reinforced the gloom. Eurozone factory output declined for the fourth consecutive month and hasn't been weaker since right after the Sept. 11 terror attacks, according to a survey by the consulting firm Markit Economics. Britain's factories haven't been this sluggish since 1991, while Japan's Tankan manufacturing index went negative for the first time in five years.

"2009 will be a year of global recession," said Nariman Behravesh, chief economist of Global Insight.

On the eve of a scheduled meeting of the European Central Bank, signs of pervasive economic weakness are fueling calls for interest rate reductions.

With oil prices down by one-third from their midsummer peak, inflation worries may no longer prevent central bankers from acting.

The ECB is widely expected to hold rates at the current 4.25%, but could signal its intent to cut in coming months, analysts said.

The Bank of England is seen as likely to cut its benchmark lending rate next week amid signs of a dangerous downturn in the British economy.

With banks increasingly reluctant to lend, even to good customers, reducing the cost of money may not be sufficient. What's needed are measures to thaw frozen credit channels.

"Where we go from here is more than ever a function of the government's success in unclogging the pipes in the financial sector. The longer the clogging continues, the greater the risk that consumers — first in the U.S. and then in Europe — will be directly threatened by declining credit, further falls in asset prices and growing unemployment," said Mohamed El-Erian, co-CEO of investment management firm Pimco. J.P. Morgan's index of global purchasing managers took the biggest plunge in its 11-year history and is now at 44.2, a level typically suggestive of "severe declines in manufacturing production," the firm said.

In Europe, weakness is spreading beyond countries such as Spain, which experienced a housing bubble larger than the USA's, to Germany and France.

Emerging economies also are slowing. But with China and India still performing well, some expect the global economy to muddle through the current crisis. "I don't think the world's about to end," said Sherry Cooper of BMO Capital Markets in Toronto.