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Euro zone business starts 2014 on a high

London, January 23, 2014

The global economy started 2014 on a disjointed note with the euro zone's private sector in better shape than expected and China's vast manufacturing industry contracting for the first time in six months.

Surveys on Thursday showed stronger growth across the now 18-member euro zone was marred only by an ongoing contraction in France, although the pace of that slowed. Apart from that, the upturn appeared broad-based with decent growth in both the services and manufacturing industries.

But in the first indication of sentiment for the new year in China's 56.9 trillion yuan ($9.4 trillion) economy - the world's second-largest - factories were hit by weaker domestic and export demand.

"Overall, the message from the euro zone PMIs (purchasing managers' indexes) were a good, positive surprise. It gives some support to the idea that we are going to get stronger activity growth in the earlier months of this year," said Peter Dixon at Commerzbank.

"(The Chinese PMI) is consistent with the idea that China has shifted to a lower growth path, which is exactly in line with what the government is calling for. Is it a concern? Not at this stage. It's a bit of a warning signal but that's it."

Markit's Flash Eurozone Composite Purchasing Managers' Index (PMI), which gauges business activity across thousands of companies and is seen as a good guide to economic health, jumped to 53.2 in January from 52.1 last month.

That was well above the 50 mark that denotes growth and was its highest since mid-2011, beating all forecasts in a Reuters poll of 25 economists.

An earlier composite PMI from France, the bloc's second-biggest economy, showed activity contracted for the third month running in January, although the downturn was less pronounced with both services and factory PMIs beating expectations.

In neighbouring Germany, the composite PMI rose to a 31-month high.

"The euro zone economy started 2014 on a positive footing, which is encouraging news and will reinforce hopes of a sustained recovery this year," said Martin van Vliet at ING.

Markit said if the data held near current levels, the bloc's economy would grow around 0.3-0.4 percent in the first quarter, stronger than the 0.2 percent suggested in a Reuters poll last week.

New orders rose for the sixth month, indicating the PMIs might rise higher next month. That comes after Ireland and Spain drew strong demand for bonds in auctions this month, while European shares climbed to fresh 5-1/2 year peaks on Tuesday as investors become increasingly bullish.

A Markit manufacturing survey for the United States, comparable with the euro zone and Chinese ones, is due later on Thursday and is expected to show sustained growth.

NOT SO HAPPY NEW YEAR

A Reuters visit to southern China's manufacturing heartlands this month showed many factories have closed earlier than usual for the upcoming Lunar New Year, the nation's biggest holiday, discouraged by weak orders and rising costs.

China's Flash Markit/HSBC PMI fell to 49.6 in January from December's 50.5, showing a faster rate of decrease in new export orders and employment.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.

Leaders in Beijing have pledged to push reforms to unleash new growth drivers as the economy loses steam, burdened by industrial overcapacity, piles of debt and soaring home prices.

China's annual economic expansion slowed to 7.7 percent in the fourth quarter of 2013 from 7.8 percent in the previous quarter, putting full-year growth at 7.7 percent, sightly ahead of the government's target of 7.5 percent.

While the economy narrowly missed expectations for full-year growth to fall to a 14-year low in 2013, some economists say a further cooling will be inevitable this year as officials hunker down for difficult reforms.

"Today's PMI figure reinforces our expectation of growth momentum easing further this year. We expect GDP growth to progressively slow towards the pain threshold of 7 percent later this year," said Nikolaus Keis at UniCredit. – Reuters




Tags: China | Euro zone | Global economy |

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