GLOBAL ECONOMY-Europe, US economies struggle as China stabilizes

Tue Jul 24, 2012 8:39pm IST

* Chinese slowdown likely bottomed

* Euro zone set for more pain

* U.S. manufacturing growth slowest in 19 months

By Steven C. Johnson and Jonathan Cable

NEW YORK/LONDON, July 24 (Reuters) - The struggles of the U.S. and euro zone economies intensified in July, surveys showed on Tuesday, though improved Chinese factory output suggested stimulus measures were starting to boost the world's second-largest economy.

Europe's private sector looked set for a prolonged slump as surveys showed the downturn that began in the euro zone's small economies has since become entrenched in Germany and France.

Business activity in the 17 states that use the euro shrank for a sixth straight month in July. Manufacturing nosedived, notably in Germany, suggesting recession ahead.

Europe's malaise infected businesses across the Atlantic. U.S. manufacturing this month grew at its slowest pace since December 2010, hobbled by a decline in overseas demand, according to financial information firm Markit.

Whirlpool Corp, the world's largest appliance maker, cited weak demand in Europe and a stronger dollar for its quarterly earnings miss, wh ile Te xas Instruments Inc's warned that its third-quarter revenue would be weaker than usual due to global economic uncertainties.

"The slowdown in manufacturing is a concern. We are seeing that the effect from Europe is weighing on U.S. manufacturing, and manufacturing is one of the few bright spots in this recovery," said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.

The Richmond Federal Reserve Bank 's monthly manufacturing composite index in July was the weakest reading since April 2009.

In Europe, manufacturing in Germany, the euro zone's biggest economy, contracted at its fastest pace in more than three years and its service sector also shrank. In France, factory activity fell at its fastest pace since May 2009.

The surveys should increase expectation s in financial markets for the U.S. Federal Reserve and European Central Bank to do more to help their respective economies.

CHINA ON THE MEND?

In China, the news was more encouraging, suggesting a series of policy measures, including interest rate cuts, may be starting to revive an economy that had slowed sharply of late.

HSBC's Flash China manufacturing purchasing managers index, the first significant set of data in the third quarter, r ose to 49.5 in July from 48.2 in June, closer to the 50 level that divides expansion from contraction.

The increase was driven by a jump in the output sub-index to 51.2 - the best showing since October 2011.

The PMI "adds to recent signs of stabilization of the Chinese economy, thus underpinning our view that the slowdown in activity will bottom out over the summer months," said Nikolaus Keis at UniCredit.

Chinese economic growth in the second quarter cooled to 7.6 percent from a year earlier, its slowest pace in more than three years, but still way ahead of the United States and the euro zone, which has likely fallen back into recession.

For Nomura's chief China economist, Zhang Zhiwei, the PMI provided further evidence that a slowdown in China's economy bottomed out in the second quarter of 2012.

"This suggests the effect of policy easing is being transmitted to the economy and reinforces our view that growth has bottomed in Q2," Hong Kong-based Zhang said.

VICIOUS CIRCLE

Markit's Eurozone Composite PMI, which combines the services and manufacturing sectors and is seen as a good guide to overall growth, held steady at 46.4.

A reading below 50 indicates contraction in the sector, and the euro zone composite index has been below that mark for half a year. Data collator Markit said it suggests a quarterly GDP fall of 0.6 percent.

The euro zone economy shrank 0.3 percent in the second quarter, and another quarter of contraction would tip it into its second recession since 2009.

Unlike China, forward-looking indicators in the surveys painted a gloomy picture. The business expectations index fell to a level previously seen when the bloc was last in recession.

Companies also cut their workforce at the fastest pace since the beginning of 2010, w hich some said risked extending a vicious circle in which slow growth breeds job cuts which breeds still slower growth.

"When you have all of the fiscal austerity measures ... why would you want to be hiring at this moment? The question is whether or not this is going to be a permanent state," said Sian Fenner at Lloyds Banking Group.

In the United states, new orders for exports fell for a second straight month, the first back-to-back decline in nearly three years, Markit said, as recession in Europe dented demand for U.S. products.

Economists worry that the broader U.S. economy, which grew at a 1.9 percent rate in the first quarter, has since lost momentum. A poll of 74 economists polled by Reuters expects April-to-June growth to have slowed to a 1.5 percent pace.

As a result, Wall Street expects another round of monetary easing from the Federal Reserve. The median forecast in a July poll of 16 primary dealers showed a 70 percent chance the Fed would do more to boost the economy.

Earlier this month the European Central Bank cut its main refinancing rate to a record low 0.75 percent and the deposit rate to zero, and a Reuters poll of economists showed the ECB will likely do more to stimulate the economy, possibly by offering more cheap loans for banks.

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