China, Asian factory growth gathers pace; Europe falters

Monday, 4 August 2014 00:00 - - {{hitsCtrl.values.hits}}

BANGALORE/SYDNEY (Reuters): Manufacturing activity in China and most of Asia gathered pace in July as firms responded to burgeoning new orders by raising output, hinting at a revival in global trade, although euro zone factories barely managed to chug along. China’s official manufacturing purchasing managers’ index (PMI) rose to 51.7 in July – the strongest since April 2012 – beating expectations for 51.4 and up from 51 in June. The HSBC/Markit measure also rose to 51.7, an 18-month peak. A comparable survey in the euro zone disappointed, however, as factories there grew less than expected, with the PMI at 51.8, matching June’s reading and below a flash estimate. A reading above 50 separates growth from contraction. While the China PMI suggests Beijing’s stimulus measures were gaining traction in the world’s second largest economy, the lull in euro zone factories and firms’ inability to increase prices underscored the fragility of Europe’s recovery.

“There are clear disparities between Europe and Asia in the PMIs but ... exports should pick up reasonably well globally and the euro zone’s largest economy, Germany, should benefit from it,” Commerzbank economist Peter Dixon said. The latest CIPS/Markit data for Britain showed the weakest factory growth in a year along with modest price rises. The PMI fell sharply to 55.4 in July from 57.2 in June. Markit said the index was still well above its long-term average. The lull in continental Europe comes despite data this week showing US economic growth rebounded in April-June after a winter slump. A survey due later on Friday is likely to show US factory activity expanding at its fastest pace this year. The Institute for Supply Management (ISM) index is expected to rise to 56.0 from 55.3 in June, according to a Reuters poll. Much will also depend on US jobs data due on Friday. US employers are expected to have added 233,000 new jobs in July, fewer than the 288,000 created in June, but still considered a healthy rate, required for faster economic growth. That should keep the Federal Reserve on track to wean the economy off stimulus by October and begin raising interest rates from record lows in the first half of next year. Swelling Asian order books Major Asian economies that have long thrived on exports to the West slowed in recent years as faltering economic recoveries in the United States, Britain and other industrialised nations hurt demand for their products. But with export orders flooding factories in China, India and Taiwan, according to the latest PMI reports, and with brighter signs of an economic revival in the United States and Britain, that is set to change. Analysts said the strong China numbers point to better economic growth than the 7.5% seen in the second quarter. “Taken literally, these PMIs signal an exceptionally strong start for third-quarter growth in China,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. India’s factory activity expanded at its fastest pace in 17 months in July, driven by a surge in new orders and output, while Taiwanese manufacturers also reported a robust improvement in overall business conditions on rising export demand. Input prices rose sharply for Indian factories, however, indicating inflation may remain elevated as firms seek to pass on the higher costs to consumers, limiting chances of a rate cut from the Reserve Bank of India at next week’s meeting. South Korea also reported exports to the United States expanded by over 19% in July, although subdued inflation and weakness in shipments to China kept alive the prospect of an interest rate cut at this month’s central bank policy review.

But no pricing power in euro zone Worryingly for euro zone policymakers, however, still-feeble growth in output and new business meant factories in the 18-country bloc were barely able to increase prices in July. The latest PMI data came a day after news that euro zone inflation dropped to 0.4% last month, its lowest since the depths of the financial crisis nearly five years ago. The European Central Bank announced a raft of measures in June to counter the threat of deflation, including cutting the deposit rate below zero to compel banks to lend. It will also offer hundreds of billions of euros more of long-term cash to banks later this year, tied to lending to businesses. But the rising deflationary risks suggested by the survey could hamper its efforts to spur growth, if companies defer spending on expectations that prices may fall further.