February 3, 2016 / 6:28 PM / 2 years ago

Global business activity starts 2016 on weak note

A pedestrian walks past an electronic board showing the graph of the recent fluctuations of Japan's Nikkei average outside a brokerage in Tokyo, Japan, February 3, 2016. REUTERS/Yuya Shino

LONDON (Reuters) - Global economic growth began 2016 on a weak note, surveys of business activity suggested on Wednesday, and with inflation remaining low central banks are seen under pressure to keep monetary policies easy.

U.S. and European stocks were lower on Wednesday in the wake the business surveys, though weak oil prices continue to be a major factor in stock and bond markets.

US SERVICE SECTOR GROWTH SLOWS

U.S. service sector activity slowed in January, suggesting economic growth weakened at the start of the first quarter even though the labor market remained resilient.

The U.S. service sector purchasing managers’ index (PMI) from data vendor Markit for Jan fell to 53.2, the lowest since October 2013, from 54.3 in Dec. An index reading above 50 indicates expansion in the sector.

Markit’s U.S. composite PMI for both the service and manufacturing sectors fell to 53.2 from 54.0 in Dec.

An alternative reading from the U.S. Institute of Supply Management (ISM) showed the service sector PMI fell to 53.5 in January, the lowest since February 2014, from 55.8 in December.

ISM’s U.S. manufacturing sector PMI for January, published Monday, showed activity contracted.

“Going back a half year or so, it had seemed that the weakness in the economy was fairly isolated in the manufacturing sector as well as a few other areas, mainly energy and exports,” said Daniel Silver, an economist at JPMorgan in New York.

“But we now have these surveys showing that the service sector has weakened as well over the past few months.”

EURO ZONE ACTIVITY WEAK

Euro zone business activity started 2016 at its weakest in a year, adding to pressure on the ECB to ease monetary policy again.

Markit’s euro zone service sector PMI fell to 53.6 in January from 54.2 in December. Markit’s euro zone composite PMI, seen as a good guide to economic growth, fell to 53.6 from December’s 54.3.

Markit said the euro zone PMIs point to growth of 0.4 percent at the start of the year, in line with a January Reuters poll.

The European Central Bank is expected to cut its deposit rate further into negative territory in March and may increase the 60 billion euros a month it currently spends buying bonds, a Reuters poll found.

“Deflationary pressures intensified, as lower oil prices impacted both input and output costs, consistent with our view that the moderate euro area recovery will continue to take place in a ‘missingflation environment’”, said economist Apolline Menut at Barclays Capital.

In one bright spot, retail sales across the 19 countries using the euro increased in December as sales of food, drinks and tobacco rose over the Christmas period, according to official data released on Wednesday.

However, Britain’s service sector growth was unscathed despite firms’ concerns about the risk of a referendum on European Union membership likely in June.

The UK Markit/CIPS services PMI edged up to 55.6 in January, from 55.5 in Dec, to a level it has surpassed only once since July last year.

Britain’s economy looks set to expand by 0.6 percent in the first quarter of 2016, picking up from estimated growth of 0.5 percent in the last three months of last year, Markit said.

A reading on Britain’s manufacturing sector published on Monday showed the factory sector also grew, while research group NIESR said earlier it expects Britain’s economy to grow 2.3 percent this year, a slight improvement on 2015.

The Bank of England is expected on Thursday to keep interest rates at their record low of 0.5 percent, where they have been kept since 2009.

ASIA IMPROVES

Activity in China’s services sector expanded at its fastest pace in six months in January, helping to offset the weakness in its manufacturing sector.

The Caixin/Markit service sector PMI rose to 52.4 in January from a 17-month low reading of 50.2 in December. The increase was the largest since August 2014.

On Monday the Caixin/Markit China manufacturing survey had shown the factory sector shrank for an 11th consecutive month in January.

A composite Caixin output index covering both manufacturing and services rose to just above 50 in January.

In 2015, the contribution from the services sector to China’s GDP climbed to 50.5 percent.

China’s official manufacturing PMI showed manufacturing activity contracted at its fastest pace since August 2012, while the official service sector PMI also suggested service sector growth slowed from December.

China’s economy grew 6.9 percent in 2015, the weakest pace of growth in a quarter of a century.

“The government should continue to deepen reform, relax administrative controls and reduce restrictions on market entry for service providers,” said He Fan, chief economist at Caixin Inight Group.

Japan also saw better news with activity in its service sector in January growing at the fastest pace in five months.

The Markit/Nikkei Japan service sector PMI rose to 52.4 in January from 51.5 in December, remaining above the 50 threshold for the 10th consecutive month.

In 2014, services accounted for 65 percent of Japan’s gross domestic product, while manufacturing had a 21 percent share.

The Bank of Japan stunned investors last week by introducing negative interest rates to prevent concerns about a weakening global economy from derailing inflation expectations.

Activity in India’s services sector increased at its fastest pace in more than 18 months in January, with the Nikkei/Markit PMI at 54.3 in January from the 53.6 in December, the seventh straight month above the 50-level.

India’s manufacturing activity unexpectedly returned to growth in January according to a similar survey published earlier this week.

The Reserve Bank of India held its benchmark interest rate at 6.75 percent on Tuesday. Asia’s third-largest economy is expected to grow at a steady rate and outpace China over the coming year.

Additional reporting by Winni Zhou and Nicholas Heath in Beijing; Stanley White in Tokyo, Aaradhana Ramesh in India, William Schomberg in London, Lucia Mutikani and Dan Burns in New York; Editing by Hugh Lawson and Clive McKeef

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