GLOBAL ECONOMY-Factory activity shrinks across Asia, global recession fears mount

* Activity contracts in Japan, S.Korea, Malaysia, Taiwan
* China Caixin PMI 50.2, but official gauge 49.4
* Trade tensions flare up; global economy could face
recession
* Weak economy may spark c.bank "race to the downside" on
rates

By Marius Zaharia
HONG KONG, June 3 (Reuters) - Factory activity contracted in
most Asian countries last month as an escalating trade war
between Washington and Beijing raised fears of a global economic
downturn and heaped pressure on policymakers in the region and
beyond to roll out more stimulus.
Such growth indicators are likely to deteriorate further in
coming months as higher trade tariffs take their toll on global
commerce and further dent business and consumer sentiment
leading to job losses and delays in investment decisions.
Some economists predict a world recession and a renewed race
to the bottom on interest rates if trade tensions fail to ease
at a Group of 20 summit in Osaka, Japan at the end of June, when
presidents Donald Trump and Xi Jinping could meet.
In China, Asia's economic heartbeat, the Caixin/Markit
Manufacturing Purchasing Managers' Index (PMI) showed only
modest expansion at 50.2, but output growth slipped, factory
prices stalled and businesses were the least optimistic on
production since the survey series began in April 2012.
An official gauge on factory activity on Friday, which
analysts say reaches a broader spectrum of participants, was in
contraction as both domestic and external demand slackened.
PMIs were below the 50-point mark separating contraction
from expansion in Japan, South Korea, Malaysia and Taiwan, came
below expectations in Vietnam and improved slightly in the
Philippines.
"The additional shock from the escalated trade tensions is
not going to be good for global trade and if demand in the U.S.,
China and Europe continues to soften, which is very likely, it
will bode ill for Asia as a whole," said Aidan Yao, senior
emerging markets economist at AXA Investment Managers.
"In terms of the monetary policy response, almost everywhere
the race is going to be to the downside."
Central banks in Australia and India are expected to cut
rates this week, with others around the world seen following
suit in coming weeks and months.
Euro zone activity is expected to shrink as well, while U.S.
manufacturing is expected to grow steadily, although economists
expect the global malaise to eventually feed back into the U.S.
economy. Fed funds rate futures 0#FF: are now almost fully
pricing in a rate cut by September, with about 50 percent chance
of a move by July 30-31.
J.P. Morgan expects the Federal Reserve to cut rates twice
this year, a major change from its previous forecast that rates
will stay on hold until the end of 2020.
India, one of the world's leaders in terms of growth, will
publish PMI data later on Monday. On Friday, data showed the
economy growing at its slowest pace in more than four years in
January-March. FEARS
The trade conflict between China and the United States
suddenly escalated last month when U.S. President Donald Trump
raised tariffs on hundreds of billions of Chinese imports to 25%
from 10% and threatened levies on all Chinese goods.
If that were to happen, and China were to retaliate, "we
could end up in a (global) recession in three quarters," says
Chetan Ahya, global head of economics at Morgan Stanley.
Over the weekend tensions flared again, with the two
countries clashing over trade, technology and security.
China's Defence Minister Wei Fenghe warned the United States
not to meddle in security disputes over Taiwan and the South
China Sea, while acting U.S. Defence Secretary Patrick Shanahan
said Washington would no longer "tiptoe" around Chinese
behaviour in Asia. On Friday, China also threatened to unveil an unprecedented
hit-list of "unreliable" foreign firms, groups and individuals
that harm the interests of Chinese companies. That came after
Washington last month put Huawei HWT.UL on a blacklist that
effectively blocks U.S. firms from doing business with the
Chinese telecoms equipment giant.
"We take this seriously. It means that the trade war has not
only become a technology war but also a broad-based business
war. There will be more retaliation actions from China,
especially for the technology sector," said Iris Pang, Greater
China economist at ING.
"On military war with respect to Taiwan, we believe that
this is a bit distant. But we are not dismissing the warnings of
war out of hand."
Washington's new tariff threats against Mexico last week
also contributed to global recession fears, with stock markets
tumbling around the world. The 10-year U.S. Treasuries yield
fell to 2.121% US10YT=RR , a nadir last seen in September
2017. MKTS/GLOB
South Korea's exports - seen as a bellwether of world growth
- fell 9.4% in May, worse than a median forecast for a 5.6%
decline, data showed on Saturday.
"Investors may need to accept that the U.S. is comfortable
fighting a trade war on many fronts," said J.P. Morgan Asset
Management Global Market Strategist Hannah Anderson.
"Collectively this means an effective limbo for investors,
featuring more volatility and lower growth."