* Global economy could face recession
* Data deteriorated before latest flare up on trade
* Weak economy may spark c. bank "race to the downside" onrates (Adds U.S. data; changes dateline, previous LONDON/HONG KONG)By Trevor Hunnicutt, Jonathan Cable and Marius ZahariaNEW YORK/LONDON/HONG KONG, June 3 (Reuters) - Factoryactivity slowed in the United States, Europe and Asia last monthas an escalating trade war between Washington and Beijing raisedfears of a global economic downturn and heaped pressure onpolicymakers to step up support.Such growth indicators are likely to deteriorate further incoming months as higher trade tariffs take their toll oncommerce and dent business and consumer sentiment, leading tojob losses and delaying investment decisions.Some economists predict a world recession and a renewed raceto the bottom on interest rates if trade tensions fail to easeat a Group of 20 summit in Osaka, Japan, at the end of June,when presidents Donald Trump and Xi Jinping could meet.
The U.S.-China trade war, slumping car sales and Britain'sstumbling European Union exit took their toll on manufacturingactivity last month.U.S. manufacturing activity growth declined in May, separatesurveys by the Institute for Supply Management (ISM) and IHSMarkit Ltd showed. The ISM reading of 52.1 was a surprisedecline and the worst showing since October 2016, while theMarkit Purchasing Managers' Index (PMI) was at its lowest levelsince the 2009 global financial crisis.U.S. Commerce Department data on construction spendingshowed no change in April, disappointing expectations. But thereport also included upward revisions of data from the firstquarter. The data was largely gathered before an escalation in tradetensions last week as U.S. President Donald Trump threatened newtariffs against Mexico. Trump also decided to endpreferential trade treatment for India. Markets appeared to price in higher chances of recession andrate cuts by the Federal Reserve and other central banks. Yieldson the 10-year Treasury hit 2.071%, their lowestlevels in more than 1-1/2 years, while traders pushed short-terminterest rates futures to levels implying the Fed couldbegin cutting rates as soon as next month. "There was a big change in the bond market," CornerstoneMacro LLC researcher Roberto Perli wrote in a note. "We don'tlike to utter the word 'recession' lightly, but the bond marketreaction on Friday in response to the Mexico tariff news wasominous."Earlier data showed manufacturing activity contracting at afaster pace in the euro zone during May, British manufacturersseeing their steepest downturn in almost three years andcontraction in Japan, South Korea, Malaysia and Taiwan.After an official gauge on Friday showed contraction inChina, the Caixin/IHS Markit Manufacturing PMI showed modestexpansion, offering investors some near-term relief.
The outlook, however, remained grim as output growthslipped, factory prices stalled and businesses were the leastoptimistic on production since the survey series began in April2012."The additional shock from the escalated trade tensions isnot going to be good for global trade. In terms of the monetarypolicy response, almost everywhere the race is going to be tothe downside," said Aidan Yao, senior emerging markets economistat AXA Investment Managers.
RECESSION FEARSThe trade conflict between China and the United Statesescalated last month when Trump raised tariffs on some Chineseimports to 25% from 10% and threatened levies on all Chinesegoods.If that were to happen, and China were to retaliate, "wecould end up in a (global) recession in three quarters", saidChetan Ahya, global head of economics at Morgan Stanley.Tensions flared again between the United States and Chinaduring the weekend over trade, technology and security.
China's defense minister Wei Fenghe warned the United Statesnot to meddle in security disputes over Taiwan and the SouthChina Sea, while acting U.S. Defense Secretary Patrick Shanahansaid Washington would no longer "tiptoe" around Chinese behaviorin Asia. "We take this seriously. It means that the trade war has notonly become a technology war but also a broad-based businesswar. There will be more retaliation actions from China,especially for the technology sector," said Iris Pang, GreaterChina economist at ING.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Global PMI activity and trade Manufacturing activity in Asia ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
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