Jonathan Cable and Koh Gui Qing London and 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 yesterday, will ease some worries about the outlook for the global economy. But news that euro zone companies cut prices at the steepest rate in almost five years will concern the European Central Bank, which is striving to ward off the risk of deflation.
In China, manufacturers booked more foreign and domestic orders but activity remained weak. 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 doesn’t point to a substantial improvement,” Andrew Kenningham, a senior global economist at Capital Economics, said. “It’s an unbalanced picture with strong and sustainable growth in the US and the UK, feeble growth… in the euro zone and Japan, and emerging economies have slowed to a new lower trend growth rate.”
Markit’s euro zone 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 poll forecasts.
The poll had predicted a fall to 51.7 from September’s headline reading of 52. 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 consecutive month.
“The general tone of the October purchasing managers’ survey suggests that the fourth quarter is going to be another… struggle,” Howard Archer at IHS Global Insight said.
Markit said the PMIs pointed to a 0.2 percent expansion of euro zone gross domestic product in the current quarter, with risks to the downside. A 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 in five years in September, official data showed last week. 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 yesterday after a poor start and leavened an otherwise shaky mood following the Chinese numbers.
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,” Shuang Ding at Citi in Hong Kong said. “The production sub-index and 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.
Factory activity in Japan, which has been battling weak consumer demand, grew at its fastest rate in seven months in October and the pace of orders picked up. – Reuters