China brakes as euro zone gears up

Wednesday, 26 March 2014 00:09 - - {{hitsCtrl.values.hits}}

REUTERS: China’s huge manufacturing engine stuttered in the early part of 2014 while a return to growth in French business activity this month suggested a solid, broad-based recovery was taking shape in the euro zone, surveys showed. Weaker-than-expected readings from China pointed to a contraction in the first three months of the year and will raise market expectations of government stimulus to arrest a loss of momentum in the world’s second-largest economy. “It tells you something about the extent to which market concerns about a slowdown in China are justified,” said Peter Dixon at Commerzbank. “In the euro zone, the economy is bowling along at a reasonable pace.” A solid expansion in both the euro zone’s manufacturing and services industries in March, and growth in its second-biggest economy France, meant the bloc’s recovery pace barely slowed from February’s 2-1/2-year high. But the threat of deflation in the region was highlighted by surveyed firms’ increasing willingness to cut prices to attract customers. Data due later from the United States is expected to show manufacturing growth in the world’s top economy eased this month from February’s near four-year record high. China’s flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to an eight-month low of 48.1 in March from February’s final reading of 48.5.

The index has been below 50 since January, indicating a contraction in the sector this year. Output and new orders both weakened but new export orders grew for the first time in four months, the survey showed, suggesting the slowdown has been driven primarily by weak domestic demand. “Usually, for the month of March, the PMI will rebound, because after Chinese New Year, there should be some activity coming back, but this PMI is disappointing,” said Wei Yao, China Economist at Societe Generale in Hong Kong. “The Government probably will have to provide some supporting measures.” Earlier this month, sources told Reuters the Central Bank in Beijing was prepared to loosen monetary policy in order to keep the economy growing at 7.5%. Last year, China’s economy grew 7.7%, the same pace as in 2012. Premier Li Keqiang said last week investment and construction plans would be accelerated to ensure domestic demand expands at a stable rate. Further signs of a slowdown in China pushed European shares lower on Monday, although robust data from France and Germany limited their decline. Building bloc The euro zone’s composite PMI, which is seen as a good growth indicator, edged down to 53.2 from February’s 32-month high but Markit said it indicated a 0.5% economic expansion this quarter, stronger than the 0.3% predicted in a Reuters poll earlier this month. Having lagged the recovery in much of the euro zone in recent months, France’s index surged through the 50-point threshold to reach its highest level since August 2011, while German composite figures showed growth slowed from February’s 33-month high but remained strong. “The best news in March saw manufacturing and services output not only return to growth in France but expand at the fastest rate for 31 months. Meanwhile, German expansion was pretty robust,” said Howard Archer at IHS Global Insight. But worryingly for policymakers, firms have discounted prices to drum up business for two years now - and they did so in March at a steeper rate than last month. Inflation across the currency union was just 0.7% in February, well below the European Central Bank’s 2% target ceiling, and the latest PMI will do little to allay fears of deflation in the region. A significant number of economists have doubts about the ECB’s view that deflation is not a threat and that the recovery will take hold without any more policy action. Finland’s Central Bank said on Monday inflation in the bloc could stay low for longer than previously thought, potentially making it harder to rebalance the economy. The ECB has little room to manoeuvre, having already slashed its main interest rate to near zero and given more than 1 trillion euros of cheap cash to banks for a three-year period, and it held policy steady when it met earlier this month. “The further signs of recovery will encourage the ECB in refraining from further monetary easing, at least in the short term,” said Martin van Vliet at ING.