* Trade tensions flare up; global economy could face
recession
* Weak economy may spark c.bank "race to the downside" on
rates
* India, Australia expected to cut rates this week
(Adds European data, comment)
By Jonathan Cable and Marius Zaharia
LONDON/HONG KONG, June 3 (Reuters) - Factory activity
contracted across Asia and Europe last month as an escalating
trade war between Washington and Beijing raised fears of a
global economic downturn and heaped pressure on policymakers 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.
The U.S.-China trade war, slumping automotive demand, Brexit
and wider geopolitical uncertainty took their toll on
manufacturing activity in the euro zone last month. It
contracted for a fourth month in May - and at a faster pace.
"The additional shock from the escalated trade tensions is
not going to be good for global trade. In terms of the monetary
policy response, almost everywhere the race is going to be to
the downside," said Aidan Yao, senior emerging markets economist
at AXA Investment Managers.
IHS Markit's May final manufacturing Purchasing Managers'
Index for the euro zone was 47.7, below April's level and only
just above a six-year low in March.
In Britain, the Brexit stockpiling boom of early 2019 gave
way last month to the steepest downturn in British manufacturing
in almost three years as new orders dried up, boding ill for
economic growth in the second quarter.
After an official gauge on Friday showed contraction in
China, Asia's economic heartbeat, the Caixin/IHS Markit
Manufacturing PMI showed modest expansion, offering investors
some near-term relief.
The outlook, however, remained grim as output growth
slipped, factory prices stalled and businesses were the least
optimistic on production since the survey series began in April
2012.
Central banks in Australia and India are expected to cut
rates this week, with others around the world are seen following
suit in coming weeks and months.
While U.S. manufacturing is expected to grow steadily,
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 end-July.
J.P. Morgan now expects the Federal Reserve to cut rates
twice this year, a major change from its previous forecast that
rates would stay on hold until the end of 2020.
Meanwhile, Monday's survey adds to evidence that the euro
zone economy is under pressure and will likely be of concern to
policymakers at the European Central Bank, who have already
raised the prospect of further support.
There is little likelihood of them hiking interest rates
before 2021, according to economists in a Reuters poll last
week. They said the bank's next policy move would be to tweak
its forward guidance towards more accommodation. ECILT/EU
RECESSION FEARS
The trade conflict between China and the United States
escalated last month when Trump raised tariffs on some 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", said
Chetan Ahya, global head of economics at Morgan Stanley.
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
Tensions flared again between the United States and China at
the weekend 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. "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.
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Global PMI activity and trade https://tmsnrt.rs/2WzqeyD
Manufacturing activity in Asia https://tmsnrt.rs/2WEzX6W
GRAPHIC-Asian interest rates - Interactive http://tmsnrt.rs/1U5hc2W
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(Editing by Simon Cameron-Moore and Gareth Jones)