July 24, 2014 / 10:39 AM / 5 years ago

Global economy starts second half on solid footing: PMIs

(Reuters) - China’s factory activity expanded at its fastest in 18 months in July, while the euro zone’s private sector also perked up, but the pace of U.S. manufacturing expansion slowed.

A worker climbs over a solar panel at a solar factory in Longyou county, Zhejiang province, June 24, 2014. REUTERS/William Hong

While China is relying on increased government stimulus to steer its economy away from reliance on exports and towards consumer spending, Europe has taken the opposite approach, combining fiscal austerity with near-zero interest rates, and the U.S. is beginning to wind down its monetary expansion.

The latest HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index on Thursday rose to 52 in July from 50.7, the highest reading since January 2013, and well above the 50-point level that separates growth from contraction.

A comparable survey of private sector activity in the euro zone also rose more than expected, to 54.0 from 52.8, with inflation remaining lows.

“The strength of this morning’s data from China and the euro zone offers some encouragement that there is some momentum building for the global economy at the start of the third quarter,” said Mark Wall, European economist at Deutsche Bank.

However, the pace of expansion in the U.S. manufacturing sector eased in July with new orders and employment also growing more slowly, according to private data vendor Markit on Thursday.

The preliminary U.S. Manufacturing Purchasing Managers Index was 56.3 in July, down from the June reading of 57.3 and below analyst expectations for a reading of 57.5.

The output subindex dipped slightly, to 60.4 from 61 in June, a level that had been its highest since April 2010. The employment gauge fell to its weakest level since September, dropping to 51.2 from 54.

“The (U.S.) data suggest the sector is growing at an annualized rate of roughly 8.0 percent as we moved into the second half of the year,” said Chris Williamson, chief economist at Markit.

“The growth rebound that the survey has signaled for the second quarter therefore looks to have been sustained into the third quarter.”

Despite the slightly weaker U.S. numbers, with most major stock markets rallying or near record highs, the reports suggest the world economy is in a brighter spot.

“We still don’t have second quarter growth numbers for the U.S. or euro zone. And although the Bundesbank said earlier this week that German growth could stagnate in the second quarter, what’s at least encouraging from the PMI data is it seems any disappointment yet to be published might well be temporary,” added Deutsche Bank’s Mark Wall.


The China PMI data coincided with the latest Reuters poll on the outlook for Asia, which suggested China will struggle to maintain these rates of economic growth into next year, partly because of risks a property market downturn might threaten the economy.

Analysts polled by Reuters expect the world’s No. 2 economy to expand by 7.4 percent this year, slightly below the last reported rate of 7.5 percent. That would be its weakest growth in nearly a quarter of a century.

Some analysts say that more stimulus may be needed to offset any downdraft from falling property prices and activity. There are also increasing risks in the financial system, such as deteriorating credit quality.

For the euro zone, where forecasters are even more gloomy about growth prospects, the latest PMI data were a bright spot and triggered a rally in the euro from an eight-month low.

Markit said the euro zone data suggest quarterly economic growth of 0.4 percent in the current quarter if a similar pace is maintained over the next two months.

Lagging economies like Spain performed even better, with the largest monthly increase in business activity recorded since August 2007 accompanied by a similar surge in new orders growth.

And while euro zone services sector business activity expanded at its fastest pace since May 2011, with the PMI rising to 54.4, the index measuring output price changes fell to 48.3, suggesting downward pressure on inflation, despite high raw materials costs.

With inflation stuck at 0.5 percent in June, far into the ECB’s “danger zone” below 1.0 percent, and well short of its 2.0 percent target, that suggests policymakers still face a tough task to thwart the threat of deflation.

“There’s so much spare capacity that deflation remains a bigger risk at the moment,” said Chris Williamson, Markit’s chief economist. “Companies simply cannot push through cost increases to consumers at this point.”

Separate official data showed British retail sales were the strongest in 10 years over the second quarter, even though they stagnated in the latest month.

While the Bank of England and the U.S. Federal Reserve are expected to raise interest rates from record lows in the first half of next year, the latest Reuters poll found that rates are expected to remain steady in most of Asia for the rest of 2014.

Reporting by Sumanta Dey, Aileen Wang, Koh Gui Qing and Ryan Vlastelica; Editing by Ross Finley, Catherine Evans, Clive McKeef and Chizu Nomiyama

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