Business Activity Improves in China, Euro Zone but Little Sign of Turnaround

By Jonathan Cable and Koh Gui Qing on 06:39 pm Oct 23, 2014
Category Business
Laborers work in a shoe factory in Jinjiang, south China's Fujian province on September 17, 2013. Foreign direct investment (FDI) into China rose 6.37 percent year-on-year in the first eight months of 2013, the government said September 17, adding it was a sign of investor confidence in the world's second-biggest economy.   AFP PHOTO CHINA OUT

Laborers work in a shoe factory in Jinjiang, south China’s Fujian province. (AFP Photo)

London/Beijing. Euro zone businesses performed much better than forecasters expected this month and China’s vast factory sector grew a shade faster but there were worrying signs that the upturn could be short-lived.

The improvement in purchasing managers’ surveys, released on Thursday, will ease some worries about the outlook for the global economy, but news that companies in the euro zone cut prices at the steepest rate in almost five years will be of concern to the European Central Bank, which is striving to ward off the risk of deflation in the region.

In China, manufacturers booked more foreign and domestic orders but activity remained weak and analysts said the surveys did not point to a fourth-quarter turnaround for the slowing economy.

“They don’t change the picture for the euro zone which is bordering on recession. For China, although the headline number edged up, it really doesn’t point to a substantial improvement,” said Andrew Kenningham, senior global economist at Capital Economics.

“It’s a very unbalanced picture with strong and sustainable growth in the US and the UK, feeble growth—if any—in the euro zone and Japan, and emerging economies have slowed to a new lower trend growth rate.”

Markit’s Eurozone Composite Flash Purchasing Managers’ Index (PMI), based on surveys of thousands of companies across the region and seen as a good indicator of growth, rose to 52.2, above all forecasts in a Reuters poll.

The poll had predicted a fall to 51.7 from September’s headline reading of 52.0 and October marks the 16th month the index has been above the 50 level that separates growth from contraction.

But optimism about the future among services firms was at its lowest level in over a year and new orders to factories fell for a second straight month.

“The general tone of the October purchasing managers’ survey suggests that the fourth quarter is going to be another almighty struggle,” said Howard Archer at IHS Global Insight.

Markit said the PMIs point to a 0.2 percent expansion of euro zone GDP in the current quarter, with risks to the downside. A Reuters poll last week also predicted 0.2 percent growth.

While Germany’s private sector saw faster growth this month, France’s business slump deepened, with business activity hitting an eight-month low.

In Britain, retail sales fell more than expected in September, despite store prices falling at their steepest rate in more than five years, adding to signs the economic recovery is losing some of its pace.

Similarly, euro zone inflation slipped to its lowest for five years in September, official data showed last week, and the latest PMIs will do little to allay fears that deflation—which hit five peripheral countries last month—will spread.

“Given the concerns over potential euro zone deflation, it was particularly worrying that the purchasing managers reported combined manufacturing and services output prices fell at the fastest rate since February 2010,” Archer said.

The composite output price index slumped to 47.1 from 48.5.

The European surveys lifted share markets on Thursday after a poor start and leavened an otherwise shaky mood following the Chinese numbers.

Cracks in China

China’s flash HSBC/Markit manufacturing PMI edged up to a three-month high of 50.4 from a final reading of 50.2 in September, and just a hair’s breadth from the 50.3 reading forecast by analysts.

Growth in new orders at home and abroad, however, slowed in October and producer prices fell, pushing factory inflation to a seven-month low and highlighting still-soft domestic demand. The index measuring the rate of growth in factory output also fell to a five-month low of 50.7.

“The sub-indices do not show good momentum,” said Shuang Ding, an economist at Citi in Hong Kong.

“Both the production sub-index and the new order sub-index dropped. Those are more relevant in terms of industry production and forward-looking activity.”

China’s economy appears likely to miss the government’s 7.5 percent growth target this year and hit a trough not seen since 1990. Third-quarter growth of 7.3 percent reported on Tuesday was the weakest since the global financial crisis.

A sagging housing market, sluggish domestic demand and erratic exports have dampened activity this year and while exports have recently shown signs of picking up, the property market and investment continues to cool and many companies are being pinched by tighter credit.

Still, while growth is unlikely to accelerate in the fourth quarter, the flash PMI indicates it may at least be leveling off.

“If the flash PMI is right, then October is going to be almost the same as September, slightly better, which suggests that at least it’s not getting worse, that growth has stabilized at this quite subdued level,” said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong.

Factory activity in Japan, which has also been battling weak consumer demand, grew at its fastest rate in seven months in October and the pace of both domestic and export orders picked up.

Reuters