Euro zone headed for recession, China, U.S. struggle

NEW YORK/LONDON Thu Aug 23, 2012 9:20pm IST

An employee checks on a steel product at a steel production factory in Wuhan, Hubei province, August 2, 2012. REUTERS/Stringer/Files

An employee checks on a steel product at a steel production factory in Wuhan, Hubei province, August 2, 2012.

Credit: Reuters/Stringer/Files

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NEW YORK/LONDON (Reuters) - World business surveys on Thursday painted a picture of economic malaise stretching from Beijing to Berlin, adding to concerns that the world economy was slowing down.

The 17-country euro zone appeared headed for its second recession in three years. Financial data firm Markit said its Purchasing Managers' Index suggested the euro zone economy would shrink about 0.5 percent in the July-to-September quarter.

Europe's problems created headaches in other economies as well, particularly China's, which counts Europe as its single biggest export market. The HSBC Flash China manufacturing PMI fell to 47.8 in August, its lowest level since November.

By contrast U.S. manufacturing activity improved slightly this month, though new export orders declined for a third straight month because of reduced demand in Europe, while the pace of hiring slowed for the fifth month in a row.

A separate report showed the number of Americans applying for first-time jobless benefits rose unexpectedly last week.

"The indicators taken as a whole indicate a material slowdown in the pace of the world economy," said economist Philip Shaw at Investec.

Whether that will be enough to provoke more action from central banks remained unclear, though. The European Central Bank is expected to cut interest rates next week, but analysts do not expect it to start a bond-buying program to reduce borrowing costs for troubled governments. <ECILT/EU>

And while minutes from the last U.S. Federal Reserve meeting suggested another round of stimulus could come "fairly soon," subsequent signs of improvement in the labor and housing markets may keep the central bank on the sidelines for a while longer.

St. Louis Fed President James Bullard on Thursday said the pace of U.S. growth would have to worsen more significantly before the Fed acted. "Going along at this slow pace is not enough to justify gigantic action," he said.

Boris Schlossberg, managing director at BK Asset Management, said Thursday's U.S. manufacturing data was "by no means impressive" but does show that the "U.S. is outperforming the rest of the world right now."

EUROPE'S TROUBLES DEEPEN

News from Europe has been less encouraging. Data Thursday showed the downturn was spreading throughout the countries that use the euro, with woes that started in the smaller states taking root in core economies such as Germany.

The flash composite PMI for Germany fell to a three-year low, a fourth straight month of contraction.

German economic growth slowed to 0.3 percent in the second quarter, suggesting it can no longer be counted on to pull the euro zone out of a deep slump.

"Another reminder that a chronic lack of economic growth in the euro zone will continue to impede efforts to bring the debt crisis to an end," said Jonathan Loynes, chief European economist at Capital Economics.

General Motors' (GM.N) German unit, Opel, said it would cut the hours of several thousand workers at two of its four plants, citing decreased demand for new cars in Europe.

The euro zone composite PMI, which measures manufacturing and services together, was slightly better than a month earlier but remained below 50, the dividing line between contraction and growth, for a seventh straight month.

"August's flash euro zone PMI does nothing to challenge the notion that the single currency area is now firmly in recession," Loynes said

The euro zone economy shrank by 0.2 percent in the three months to June, according to official data. Economists polled by Reuters last week predicted a similar outcome for the current quarter, with no growth until the start of next year.

DEMAND DIP

Japan said on Wednesday that exports slumped the most in six months in July as shipments to Europe and China tumbled. Exports from Taiwan, a key part of the global technology supply chain, fell for a fifth straight month in July. South Korea, home to major carmakers, computer chip and flat-screen producers, recorded its sharpest export fall in July in nearly three years.

Six consecutive quarters of slowing Chinese growth have also taken a toll on commodities markets, with falling prices and an uncertain outlook prompting miner BHP Billiton (BHP.AX) (BLT.L) to shelve a $20 billion expansion project in Australia.

"Today's PMI report is a clear reminder that the slowdown is not yet over and that the Chinese economy is still too shaky to recover without ongoing policy stimuli," said Nikolaus Keis at UniCredit. "The pressure on the Chinese authorities to further step up their policy accommodation is therefore growing."

China has been fine tuning policies to keep growth on track without releasing curbs on the property sector.

(Writing by Steven C. Johnson and Jonathan Cable; editing by Clive McKeef and Andrew Hay)

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