By Sumanta Dey and Wayne Cole
BANGALORE/SYDNEY (Reuters) - Factory activity in Europe and Asia cooled in August after a strong July, as new orders dwindled in the face of escalating tensions in Ukraine and a patchy recovery in China, purchasing managers indexes showed.
Despite euro zone manufacturers barely raising their prices, growth in the region slowed slightly more than initially thought, and activity in China's vast factory sector slackened on weak foreign and domestic demand, stoking speculation that further policy stimulus would be needed.
"A concerted slowdown in the China, euro zone and UK manufacturing PMIs as the second quarter gets under way raises alarm bells about global demand conditions," said Lena Komileva, chief economist at G+ Economics in London.
"This raises serious questions about the ability of major economies such as the U.S. and the UK, to weather higher interest rates, or in the case of the euro zone to withstand deflationary pressures without further stimulus."
Euro zone factories stumbled with the final August PMI at 50.7, the lowest in over a year, as new orders slowed amidst rising tensions over Ukraine that have triggered sanctions from the West and countermeasures from Russia.
Still, that was the 14th month the index has been above the 50 line that separates growth from contraction.
The factory PMI for Germany, Russia's biggest trade partner in the European Union, fell to an 11-month low while in the bloc's second-largest economy France it dropped further below the breakeven mark.
The drop in euro zone manufacturing activity came despite factories barely increasing prices and, with inflation dropping to a fresh five year low of 0.3 percent in August, that raises risks of the region slipping into deflation.
Both data come just days ahead of a European Central Bank meeting. Although fresh policy action is thought unlikely, the slowdown in growth coupled with rising risks of deflation will increase the pressure for more stimulus. [ECB/INT]
"It reinforces the case for the ECB to keep policy easy. The ECB will likely maintain a dovish tone at this meeting without any action but we expect some details on its plans to implement an asset purchase program in the coming months," said Philip Shaw, economist at Investec.
In contrast, the Bank of England and U.S. Federal Reserve are widely expected to begin raising interest rates next year with Britain tipped by analysts as the first mover. [BOE/INT]
But slowing economic activity, smaller price rises and weak pay growth mean those plans are not cast in stone.