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Europe, India factories heat up as China cools

London, May 2, 2011

Euro zone factories ramped up output and prices last month while manufacturers in India also powered ahead, business surveys showed on Monday, keeping two cycles of likely further interest rate hikes on track.

In China, monetary tightening looked to be biting into the economy more deeply than expected as the factory sector there cooled, while data due later from the United States is expected to show factories in the world's largest economy have eased off the gas too.

The Markit Eurozone Manufacturing Purchasing Managers' Index (PMI), which records manufacturing activity across all the major euro area economies, rose to 58.0 last month from March's 57.5. The index hit a near-11 year high of 59.0 in February.   

Frustratingly for policymakers, the bounce was once again driven by Germany, Europe's largest economy, and France whose growth overshadowed a continued slide to stagnation in Spain and a persistent contraction in Greece.   

"Manufacturing activity was once again robust in April in the core northern euro zone economies, led by Germany. Elsewhere the situation was not so bright," said Howard Archer at IHS Global Insight.   

Earlier figures showed India's factories expanded in April for the 25th consecutive month and at their strongest pace since November with the PMI rising to 58.0 from 57.9 in March, well above the 50 mark that divides growth from expansion.

Data on Sunday showed China's official PMI fell to 52.9 in April from 53.4 in March, falling short of market forecasts for a rise to 54 as growth in new orders weakened to an eight-month low.

"Overall, the PMI shows there is still a possibility that the Chinese economy may slow down, especially as falling demand growth leads to adjustments in inventories, increasing the possibility of slowing economic growth," said Zhang Liqun, a government researcher.   

"The fall may show that export growth will continue to slow down," Zhang said in a comment on behalf of the China Federation of Logistics and Purchasing, which compiles the official PMI.

The data sends worrying signals to the global economy, which has grown reliant on Chinese demand as a source of growth with the United States, Europe and Japan struggling to recover from the financial crisis.

South Korea's HSBC Markit manufacturing PMI fell to its lowest level since November last year at 51.69 in April from 52.84 in March.

The increase in output is coming at a cost and the euro zone PMI output price index stayed high at 61.0, only nudging down from March's survey peak of 61.5, which was revised up from a flash reading of 60.7.

Official flash data released on Friday showed consumer prices in the bloc rose 2.8 percent in April, up from March's 2.7 percent and above expectations for an unchanged reading.   

The figures will bolster those policymakers at the European Central Bank who believe the strong recovery in Europe's core economies calls for more monetary tightening before price rises become entrenched, even while weaker euro zone states remain engulfed in the debt crisis.

The ECB was the first of the world's big four central banks to raise rates when it upped them by 25 basis points from a record low of 1.0 percent earlier this month but is not seen making its next tightening move until July.

"By showing ongoing robust euro zone manufacturing activity and rising price pressures, the purchasing managers' survey reinforces belief that the ECB will pull the interest rate trigger sooner rather than later," Archer said.

Indian inflation indicators showed some easing in price pressures but from elevated levels, suggesting the Reserve Bank of India (RBI) will also hike again, as early as Tuesday, for the ninth time since March 2010.

"The number confirms that growth is not a concern and that the RBI can continue its tightening cycle uninterrupted," said Leif Eskesen, chief economist for India and Asean at HSBC.

The Reserve Bank of India is expected to hike on Tuesday, probably by 25 basis points but possibly by 50 after March headline inflation rose to nearly 9 percent.   

In China, inflation is running at its fastest in nearly three years even after a series of policy steps to rein in prices, including raising interest rates and banks' reserve requirements several times, as well as ordering banks to lend less and speeding the pace of currency appreciation.   

Economists polled by Reuters still expect strong economic growth in China this year of over 9 percent, so remain on guard for further monetary tightening to bring inflation under control. - Reuters




Tags: India | Europe | manufacturing | factories |

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