Chinese factories stalling as euro zone business picks up

LONDON/BEIJING Wed Apr 23, 2014 3:53pm IST

A worker walks past a steel factory in Beijing April 1, 2013. REUTERS/Kim Kyung-Hoon/Files

A worker walks past a steel factory in Beijing April 1, 2013.

Credit: Reuters/Kim Kyung-Hoon/Files

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LONDON/BEIJING (Reuters) - Chinese factory activity shrank for the fourth straight month in April but private businesses across the euro zone enjoyed their best month in nearly three years, surveys showed on Wednesday.

Within the euro zone, Germany - Europe's largest economy - saw activity accelerate whereas in France, the bloc's second biggest, momentum waned.

"Given the problems the euro zone faces, to get even a modest rate of positive growth this year is a good sign. But there is an increasing concern that two of the larger economies - Italy and France - are struggling to gain any traction," said Peter Dixon at Commerzbank.

"The long slide in China that we have seen in recent months might have turned a corner."

Beijing has introduced policy steps to arrest the slowdown in the world's second biggest economy and the pace of decline did moderate this month.

The HSBC/Markit flash Purchasing Managers' Index (PMI) for April rose to 48.3 from March's final reading of 48.0, but was still below the 50 line separating expansion from contraction.

"It's generally in line (with expectations), reflecting that growth momentum is stabilising," said Zhou Hao, China economist at ANZ in Shanghai.

Hao expected annual economic growth to pick up slightly to 7.5 percent in the second quarter after it slowed to 7.4 percent in the first from a year earlier, its slowest reading in 18 months.

Manufacturers in the world's biggest economy of the United States also picked up the pace this month, a sister survey due at 1445 GMT is expected to show.

European shares edged down on Wednesday after three days of gains after the Chinese data offset broadly reassuring European numbers.

FRANCE FALTERS

The euro zone's private sector started the second quarter on its strongest footing in nearly three years, but burgeoning new orders were again mainly buoyed by firms cutting prices.

Topping expectations of all 36 economists polled by Reuters, the bloc's dominant services industry led the charge while manufacturers also had a stronger month than the median forecast had suggested.

But worryingly for policymakers, who have struggled to bring inflation up to their 2 percent target ceiling, service firms cut prices for the 29th month in a row, and did so at a steeper pace than in March.

Inflation fell to just 0.5 percent in March, its sixth straight month in what European Central Bank President Mario Draghi has called a "danger zone" below 1 percent and keeping pressure on the ECB to intervene.

"Today's figure buys the ECB a bit more time. With the recovery still on track there doesn't seem to be an urgent need for strong action, though deflationary pressures still warrant attention," Peter Vanden Houte at ING said.

Markit's flash composite PMI, widely regarded as a good gauge of growth, suggested economic support may not be necessary.

It jumped to 54.0 in April from March's 53.1, above the 50 mark for the 10th month and chalking up its highest reading since May 2011. A Reuters poll had predicted no change and Markit said if maintained would point to 0.5 percent second quarter growth.

"The PMI indicator corroborates the picture that the euro zone recovery has legs," Vanden Houte said.

That growth was again led by Germany where its PMI jumped from March and was only just shy of February's 32-month high.

The rest of the bloc also performed well apart from France, where although the index held above 50 for the second month running it was down from the previous reading. The French PMI has been below the wider euro zone reading for 20 months.

France's independent fiscal watchdog said on Wednesday the government's 1.0 percent growth forecast for this year was realistic and the 1.7 percent target for 2015 was attainable but dependent on favourable circumstances.

However, a Reuters poll earlier this month predicted only 0.8 percent growth this year and 1.2 percent next.

But the picture is different in Britain. The economic recovery there is gaining momentum, minutes from the Bank of England's April 9 policy meeting showed.

"Today's minutes highlight that the outlook for the global economy has not changed much over the past few weeks, with some strength in the advanced economies versus some easing in the emerging economies," said Annalisa Piazza at Newedge Strategy.

(Editing by Janet Lawrence)

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