EU malaise spreads to China’s factories

Jonathan Cable London

THE DOWNTURN in the euro zone’s private sector is becoming entrenched and Chinese factories are finding the going increasingly tough, business surveys showed yesterday, painting a gloomier outlook for the world economy.

June is 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 (ECB) 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,” said Peter Dixon at Commerzbank. “The ECB will do more, that will probably involve a rate cut – which is symbolic – but (it) is action.”

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

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 PMI 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.

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.

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

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.

US manufacturing grew at its slowest pace in 11 months in June, while the Labor Department said the number of Americans filing new claims for unemployment benefits was little changed last week. Markit’s flash purchasing managers index (PMI) for the US manufacturing sector fell to 52.9 this month from 54.0 in May. It was the lowest since last July, although it stayed above 50, indicating expansion in activity.

Across the Pacific, China’s factory sector shrank for an eighth consecutive month in June as export orders sentiment hit its weakest level since early 2009. The HSBC flash PMI fell to a seven-month low of 48.1 in June from 48.4 in May.

Growth in China is widely expected to have slid for a sixth quarter in the three months to June as it feels the impact of the euro zone debt crisis and property controls weigh on domestic demand. – Reuters