Euro zone factories show signs of hope but Trump tariffs jolt Asia

By Jonathan Cable and Leika Kihara

LONDON/TOKYO (Reuters) -The euro zone's beleaguered manufacturing industry showed some signs of stabilisation last month but factory activity in Asia lost momentum as soft Chinese demand and threats of U.S. tariffs weighed on sentiment, surveys showed.

Global markets tumbled on Monday after U.S. President Donald Trump on Saturday followed through on his threats and ordered sweeping tariffs on imports from Mexico, Canada and China.

In the euro zone a final manufacturing Purchasing Managers' Index, compiled by S&P Global, climbed to 46.6 in January, closer to the 50 mark dividing growth from contraction as firms cheered the prospect of further interest rate cuts.

"Although the most recent PMIs indicate that growth continues to be sluggish in the beginning of 2025, we cannot rule out that consumers start consuming a higher share of their income now that interest rates have declined and real wage increases are still substantial," noted economists at Nordea.

Growth across the 20-member currency union will likely be 1.0% this year and 1.2% next year, a recent Reuters poll showed.

Euro zone inflation picked up slightly last month but did little to alter expectations the European Central Bank, which cut rates to 2.75% last week, will lower rates three more times this year.

The manufacturing downturn eased in Germany and France, the currency bloc's two biggest economies, while in Britain - outside the European Union - factories reported another tough month as output, new orders and employment all fell.

Optimism among euro zone managers about the year ahead rose above its long-term average to its highest in nearly three years despite the threat of U.S. tariffs.

But that more optimistic outlook could reverse after Trump made clear on Sunday that trade tariffs for the bloc were on their way:

"The European Union is really out of line. The UK is out of line, but I think that one can be worked out. But the European Union is an atrocity, what they've done."

ASIAN PAIN

The headwinds from China and uncertainty over the fallout from Trump's policies could pose problems for Asian economies, many of which are reliant on Chinese consumption and global trade.

China's factory activity grew at a slower pace in January, while staffing levels fell at the quickest pace in nearly five years, its private-sector PMI showed.

However, the outcome was better than an official survey last week, which indicated manufacturing activity in the world's second largest economy unexpectedly contracted in January.

In a sign of the broadening impact of China's weakness and U.S. tariff threats, Japan's factory activity fell in January at the fastest pace in 10 months, with business confidence hitting a more than two-year low.

While South Korea's manufacturing activity expanded marginally in January, that of Taiwan and the Philippines slowed as the darkening outlook for global trade weighed.

"There's caution among Asian companies over Trump's tariff threats," said Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute.

Shares of Japanese and South Korean carmakers and their suppliers were hit hard on Monday, as Trump's weekend announcement took a toll on exporters across the region. Shares in some of the biggest European carmakers also slumped.

China's Caixin/S&P Global manufacturing PMI slipped to 50.1 in January from 50.5 the previous month, missing analysts' forecasts and easing to a four-month low.

Japan's final au Jibun Bank PMI slumped to 48.7 in January, lower than 49.6 in December and remaining below the 50.0 threshold for a seventh consecutive month.

On a brighter note, India's factory activity grew in January at the quickest pace in six months on resilient demand and strong output.

(Reporting by Jonathan Cable and Leika Kihara; Editing by Shri Navaratnam and Christina Fincher)