Euro zone bounces back to growth as China stalls

By Jonathan Cable and Langi Chiang
LONDON/BEIJING | Wed Jul 24, 2013
(Reuters) – Euro zone private industry unexpectedly bounced back to growth this month but its recovery risks being derailed as China’s huge manufacturing engine is losing steam, surveys suggested on Wednesday.

The euro zone results will provide welcome reading for European Central Bank policymakers who have promised to do whatever it takes to help the economy emerge from the longest recession in its history.

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But while European manufacturers boosted the private sector back to growth in July for the first time in more than a year and a half, China’s factories lost further momentum, boding ill for those exposed to the world’s second-largest economy.

“China’s slowdown is starting to become more dangerous,” said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.

Knock-on effects are already being felt widely – from a slowdown in Japanese export growth despite a weaker yen, to Apple (AAPL.O) lamenting a rare drop in Chinese demand for its premium brand of products.

Still, Markit’s flash Eurozone Composite PMI, based on surveys of thousands of companies across the region and a reliable indicator of growth, jumped to an 18-month high of 50.4 in July from 48.7 in June.

That smashed even the most optimistic forecast in a Reuters poll and is the first month the PMI has been above the 50 mark that divides growth and contraction since January 2012.

The upbeat surveys come after official data showed French industrial morale was at its highest in over a year in July while Italian retail sales rose on a monthly basis for the first time in 14 months.

“Better-than-expected PMI figures clearly support the notion that the euro zone economy as a whole is leaving recession behind,” said Martin van Vliet at ING.

“(But) recent weakness in the Chinese manufacturing PMI is a reminder that a strong euro zone export recovery is unlikely.”

Germany’s composite reading rose to a five-month high of 52.8 but in France the index held stubbornly below the 50-mark for the 17th month at 48.8, although still an improvement on June’s 47.4.


China’s overall PMI of business conditions fell to 47.7 from June’s final reading of 48.2, a third straight month below the watershed 50 line and the weakest level since August 2012.

The employment sub-index slid to 47.3 in July, the weakest since the depths of the global financial crisis in early 2009.

“This print could reignite fears of a Chinese hard landing,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. “We expect economic growth to continue moderating towards 7 percent.”

China’s economy grew 7.5 percent in April-June from a year earlier, the ninth quarter of slowdown in the past 10 quarters.

While Chinese leaders have stressed in recent weeks that reform is their priority, they are also at pains to assure investors that Beijing will not allow the economy to slip too far.

China’s moderating economic expansion nonetheless far outstrips anything the ECB could dream of engineering.

Markit said the latest PMIs tentatively pointed to 0.1 percent gross domestic product (GDP) growth in the 17-nation bloc in the current quarter, in line with a Reuters poll taken earlier this month.

The euro zone economy probably stagnated last quarter, only just scraping out of the recession it has been mired in since late 2011.

Figures on Thursday are expected to show more buoyant GDP growth in Britain last quarter and a succession of positive news from the United States suggests the world’s largest economy is well on the road to recovery.

Manufacturing growth in the U.S. gathered pace this month while new home sales picked up in June, data from the U.S. is expected to show later on Wednesday.

(Editing by Jeremy Gaunt.)

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