* Manufacturing shrinks in China, Japan, South Korea, Taiwan
* U.S.-China trade conflict seen dragging on
* Asian central banks seen delivering more stimulus
By Marius Zaharia
HONG KONG, Aug 1 (Reuters) - Asian factory activity
contracted further in July, fuelling worries that a Sino-U.S.
trade war and a slowdown in China could tilt the world towards a
global recession, which central banks will have to fight with
depleted ammunition.
Purchasing Managers' Indexes (PMI) showed manufacturing
activity contracting in China for a second consecutive month,
while export driven economies in North Asia - Japan, South Korea
and Taiwan - have been in pain for longer.
Among the emerging market economies of Southeast Asia,
Indonesia registered a contraction, but others have benefited
from a redirection of trade flows away from China.
Data later in the day is likely to show European
manufacturing shrinking as well, while U.S. factories are
expected to maintain a modest pace of expansion.
The Federal Reserve cut interest rates on Wednesday, but,
reflecting the relative strength of the U.S. economy, Chairman
Jerome Powell said the move may not be the start of a lengthy
easing campaign. He signalled, however, that the Fed could cut
further. The Bank of Japan and the European Central Bank have
flagged their readiness to ease policy in the past week, despite
having far less room than the Fed to do so.
"The numbers have been bad for a couple of months already,"
said Irene Cheung, Asia strategist at ANZ.
"Things seem to be stabilising a little bit, but they're not
recovering, the trade tensions are still there. We don't see
good news on the growth front yet. We expect (more) interest
rate cuts in the region."
In China, Asia's economic centre of gravity, the
Caixin/Markit Manufacturing PMI for July rose to 49.9 from 49.4
in June, remaining below the neutral 50-mark dividing expansion
from contraction on a monthly basis.
The readings were largely in line with an official gauge
that showed factory activity last month shrank at a
slower-than-expected pace. Analysts said the numbers reflected some impact of recent
stimulus by Chinese authorities, but the manufacturing outlook
remained a source of concern as a trade conflict with the United
States was expected to drag on.
China's manufacturing sector may have lost 5 million jobs
over the last 12 months, including possibly as many as 1.8-1.9
million due to the trade war, investment bank China
International Capital Corp (CICC) said in a report last month.
U.S. and Chinese negotiators ended a brief round of trade
talks on Wednesday with little sign of progress and agreed to
meet again in September. The White House and China's Commerce Ministry each described
the meetings in Shanghai as constructive, but neither announced
any agreements or goodwill gestures that might have cleared the
path to more substantive future talks.
The International Monetary Fund has warned that the trade
dispute will shave 0.2% off global output. Many economists say
any escalation could lead to a global recession.
"We expect that this downward trend in manufacturing will
continue in 2019 until the trade and technology negotiations
make some progress," said Iris Pang, Greater China economist at
ING.
While more stimulus from Chinese policymakers is expected
down the line, the People's Bank of China gave no sign of
whether it will immediately follow the Fed's rate cut, as it has
done on occasion.
RADIATING PAIN
Elsewhere in Asia, Japanese manufacturing deteriorated for a
third month in July, while South Korea's factory activity
contracted further with new export orders shrinking at its
fastest pace in nearly six years.
South Korea's exports, a bellwether for global trade,
tumbled for an eighth straight month in July as an escalating
political and economic dispute with neighbouring Japan painted
an increasingly gloomy picture for Asia's fourth-largest
economy.
Early in July, Japan tightened restrictions on exports to
South Korea of key materials used to make memory chips and
display panels. Economists say the curbs could shave 0.4
percentage points off South Korea's GDP this year.
In Taiwan, the streak of contraction reached its 10th month,
while Indonesia saw its first below-50 number in six months.
Vietnam, Philippines and Thailand saw mildly positive growth.
In Hong Kong, the central bank cut its base rate for the
first time in a decade, as its currency peg to the U.S. dollar
forces the monetary authority to move in lock-step with the Fed.
The financial hub's economy grew by a less than expected
0.6% in the second quarter from a year earlier, mainly affected
by slower global trade. An increasingly violent cycle of
pro-democracy protests in the Chinese-ruled city, however, is
beginning to take a heavy toll on retail and tourism and could
bring the economy to a halt in coming quarters. "Eight consecutive weeks of mass protests since early June
have already brought immediate disruption to inbound tourist
arrivals, retails sales and the property market," BofA Merrill
Lynch analysts said in a note.
"We expect to see more evidence of adverse impact in the
third quarter," they said, adding they revised their full-year
growth forecasts to 0.8% in 2019 and 0.7% in 2020, from previous
estimates of 2.2% and 2.7%, respectively.
(Editing by Simon Cameron-Moore)