Outlook darkens as Europe sinks, China struggles

The downturn in the euro zone's private sector is becoming entrenched and Chinese factories are finding the going increasingly tough, business surveys showed on Thursday, painting a darker outlook for the world economy.

June was the fifth consecutive month that activity across the euro zone has declined, dragging down heavyweights Germany and France and putting pressure on the European Central Bank to take further action to support the economy.

“We are at the point where the economy is increasingly losing traction and it's hard at this stage to see what will give us a lift. The ECB will do more, that will probably involve a rate cut - which is symbolic - but is action,” said Peter Dixon at Commerzbank.

With economic recovery showing increased fragility in the United States, the Federal Reserve delivered another round of monetary stimulus on Wednesday and said it was ready to do even more to help if the situation in Europe deteriorated.

Data due later from the United States is expected to show manufacturing growth in the world's largest economy slowed this month but that there was a slight fall in new claims for unemployment benefits.

The euro zone's private sector contracted at its fastest pace since June 2009, when the bloc was mired in a deep recession, according to Markit's Flash Composite Purchasing Managers' Index for June.

A combination of the services and manufacturing sectors which is seen as a guide to growth, the PMI fell to 46.0, slightly better than the fall to 45.5 predicted by economists in a Reuters Poll.

But the index has been below the 50 mark that divides growth from contraction in all but one of the last 10 months. The euro fell after the data and European stocks traded lower.

Analysts struggled to find much hope in the numbers.

“The only remotely positive spin that can be put on the dismal euro zone (PMI) is that there was no further deepening in the overall rate of contraction. Hardly a cause for celebration,” said Howard Archer at IHS Global Insight.

The data pointed towards a second quarter contraction of around 0.6 percent, Markit said.

Having held steady at the start of the year, the bloc's economy will contract 0.2 percent in the current quarter and narrowly escape recession by stagnating again in the next, according to economists polled by Reuters last week.

Earlier data from Germany, Europe's largest economy, showed its manufacturing sector contracted at its fastest pace since June 2009, while its service sector barely expanded, posting its lowest reading in seven months.

In neighbouring France activity declined in both sectors, albeit it at a more moderate pace than last month.

“For the time being, and if we cannot sort out the financial crisis, the euro zone is likely to remain in recession,” said Dominique Barbet at BNP Paribas.

While the euro zone has not actually met the technical definition of recession by putting in two consecutive quarters of contraction, many consider growth is so poor that it might as well have.

The danger of Greece crashing out of the euro zone eased after pro-bailout parties won weekend elections, but risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.

The two-and-a-half year old crisis has hobbled the global economy, and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.

CHINA CRACKS

China's factory sector shrank for an eighth straight month in June as export orders sentiment hit its weakest level since early 2009, indicating the country's economic trough may extend well into the third quarter.

The HSBC Flash Purchasing Managers Index, the earliest monthly indicator of China's industrial activity, fell to a seven-month low of 48.1 in June from 48.4 in May.

It marked the eighth consecutive month that the HSBC PMI has been below 50, matching a similar streak during the much deeper slowdown during the global financial crisis of 2008/2009.

Economic growth in the world's most populous nation is widely expected to have slid for the sixth straight quarter in April through June as the country feels the impact of the euro area debt crisis and property controls weigh on domestic demand.

Connie Tse, an economist at Forecast Ltd in Singapore, said she sees an “increasing chance” that second-quarter annual growth will edge close to 7 percent, which would be the weakest pace of expansion since early 2009 but way ahead of its European counterparts.

As recently as May, a Reuters poll had a median forecast of 7.9 percent for the second quarter.

“Conditions of China's manufacturing sector, especially the small and medium sized factories, continued to slip. We see little probability of this series moving back into the expansion zone in the next two months,” said Yao Wei at Societe Generale. - Reuters