The world economy is heading for its third straight mid-year lull after manufacturing output shrank in Europe and slowed in China, leaving the U.S. under pressure to drive global growth.

A gauge of manufacturing in the 17-nation eurozone fell to a three-year low of 45.1 in May, indicating a 10th month of contraction. China’s Purchasing Managers’ Index dropped to 50.4 from 53.3, the weakest production growth since December.

Signs of a renewed international slowdown are mounting as Europe’s two-year debt crisis threatens to engulf Spain and spread abroad by undermining demand and investor confidence. With China’s economy also decelerating, economists are looking to the U.S. for growth. Data Friday is forecast to show hiring picked up in May.

“Things are turning down again and the underlying state of every economy is pretty ropey,” said Rob Carnell, chief international economist at ING Bank NV in London. “The world may avoid recession, but large chunks of it will remain in it.”

U.S. Treasuries advanced, extending their biggest weekly gain this year, while the euro fell to a 23-month low of $1.2313. European stocks declined, with the Stoxx Europe 600 down 1.2 percent at 236.79 at noon in Frankfurt, its lowest in 2012.

German manufacturing faded to its weakest since June 2009 as its PMI fell to 45.2 in May from 46.2 in April, the third monthly contraction. France’s measure slid to 44.7 from 46.9 and Spain’s declined to 42 from 43.5. By contrast, Greece, the epicenter of the debt crisis, saw its gauge rise to 43.1 from 40.7 and Italy’s rose to 44.8 from 43.8. A reading below 50 still signals contraction.

Friday’s reports underscore the risk that the European economy is recession-bound as concern mounts that Greece could quit the euro and Spain struggles to find 19 billion euros ($23 billion) to recapitalize Bankia group, the country’s third biggest bank.

Europe’s troubles may spread internationally through trade and financial ties. In the U.K., which is already in recession and relies on the euro area to buy its exports, manufacturing shrank for the first time this year in May. The U.K. PMI slumped to 45.9, the weakest reading since May 2009, from 50.2.

Slowing global growth puts the onus on governments to find ways to deliver stimulus even as budgets remain bloated. Central bankers may also be forced to respond, with Morgan Stanley economists saying this week that they expect easier monetary policy from the European Central Bank and People’s Bank of China as well as perhaps the Federal Reserve.

Europe’s travails Friday led Holger Schmieding, chief economist at Berenberg Bank, to say the ECB may be forced to cut its benchmark interest rate from 1 percent as soon as next week, although he noted it may wait for the results of Greece’s June 17 election.

“If the Greek situation deteriorates after the elections and causes significant contagion, the ECB would probably step up its response considerably,” Schmieding said in a report.


Europe’s ‘Vacuum’

ECB President Mario Draghi said it wasn’t the ECB’s duty to “fill the vacuum” left by the failure of governments to deliver tighter budgets, and he joined with Italian Prime Minister Mario Monti in calling for Germany to give up its opposition to direct euro-area aid for ailing banks.

As Europe struggles, there is also concern about the speed of China’s expansion, increasing the odds that Premier Wen Jiabao will boost stimulus in the world’s second-biggest economy, which drove the global recovery from the 2008 financial crisis.

The government’s stimulus response may be as much as 2 trillion yuan ($314 billion), half the size of the package in 2008, Credit Suisse Group AG said this week.

Elsewhere in the Asia-Pacific region, South Korea’s exports declined for a third month in May, falling 0.4 percent from a year earlier. With emerging markets such as Brazil and Russia losing steam too, economists are banking on the U.S. to serve as an engine for the world. 

(Bloomberg)