Tariff risks muddy global outlook for factories

Worries over future U.S. tariffs are clouding the outlook for factories across much of Asia and Europe, according to surveys released on Tuesday which nonetheless showed some were able to shrug off the uncertainty and keep growing.

Among the bright spots, Japan's manufacturing read-out showed growth for the first time in 13 months, South Korea's activity contracted at a milder pace and China's Caixin PMI index also expanded in June - confounding an official survey that showed activity shrinking for a third straight month.

In Europe, Ireland, Spain and the Netherlands were among the star performers even as the wider euro zone read-out was broadly flat and Britain continued to contract, albeit more slowly.

Analysts said the underlying softness in surveys highlights the challenges facing businesses and policymakers as they try to navigate U.S. President Donald Trump's moves to shake up the global trade order with sweeping tariffs.

"We must recognise that the external environment remains severe and complex, with increasing uncertainties," said Wang Zhe, economist at Caixin Insight Group. The Caixin/S&P Global survey showed Chinese manufacturing PMI rose to 50.4, surpassing expectations in a Reuters poll.

Japan's final au Jibun Bank PMI rose to 50.1 due to an upswing in output, but overall demand remained weak as new orders shrank on concern over U.S. tariffs.

Factory activity in South Korea contracted for the fifth straight month though the pace of decline eased on relief over a snap presidential election on June 3 that ended six months of uncertainty.

In manufacturing, India was a significant outlier in the region last month, as activity accelerated to a 14-month high, driven by a substantial rise in international sales that helped spark a record-breaking spurt in hiring.

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Negotiators from major U.S. trading partners are rushing to reach deals with Trump's administration by a July 9 deadline to avoid import tariffs jumping to higher levels.

While China is continuing its negotiations for a broader trade deal with the U.S., Japan and South Korea have so far failed to win concessions on the tariffs imposed on their mainstay export items like automobiles. The 27-member European Union is embarking on new talks in Washington later this week.

The euro zone HCOB manufacturing Purchasing Managers' Index, compiled by S&P Global, edged up to 49.5 in June from 49.4 in May, its highest level since August 2022 - but still remaining below the 50 mark denoting growth in activity.

Moreover, national surveys revealed stark differences across the currency bloc. Ireland recorded the highest PMI at a 37-month peak of 53.7, while Greece, Spain, and the Netherlands also posted readings above 50.

"We seem to be in a sweet spot at the moment where it's domestic activity that's driving the index," John Fahey, senior economist at AIB, said of the Irish read-out.

"There may be some level of activity and investment that was postponed for two or three years, and you're just at the point now where that has to happen, even though there's a more uncertain global backdrop."

While Germany's manufacturing PMI reached its highest in nearly three years, it still indicated contraction. France, Italy and Austria on the other hand registered faster declines in manufacturing conditions.

In Britain, outside the European Union, the manufacturing sector showed some signs of turning a corner in its long slump.

"That said, any hoped for stabilisation remains fragile and subject to potential headwinds that could severely impact demand, supply chain reliability and future growth prospects," said Rob Dobson, director at S&P Global Market Intelligence.

Speaking at the start of a central bankers' annual get-together in Sintra, Portugal, European Central Bank President Christine Lagarde said the global environment had changed fundamentally since the inflation spurt of the pandemic years.

"The world ahead is more uncertain – and that uncertainty is likely to make inflation more volatile," Lagarde said.

Data on Tuesday showed euro zone inflation last month stood at the ECB's 2% target, confirming that the era of runaway prices is over.