Sumanta Dey Beijing

China’s factory activity expanded this month at its fastest pace in 18 months as new orders surged while the euro zone’s private sector perked up, suggesting the global economy started the second half of the year on a solid footing.

While China is relying on increased government stimulus to steer its economy away from reliance on exports and towards domestic consumer spending, Europe has taken the opposite approach, combining fiscal austerity with near-zero interest rates.

The latest HSBC/Markit flash China manufacturing purchasing managers’ index (PMI) suggests that government stimulus is working, rising to 52 in July from 50.7 in June, and beating the consensus forecast of 51 in a poll. It is the highest reading since January last year, and well above the 50-point level that separates growth from contraction for the second consecutive month.

A comparable survey of private sector activity in the euro zone also rose more than expected, to 54 from 52.8, even without signs of the resurgence in inflation from worryingly low levels that the European Central Bank is trying to engineer.

Taken together with data pointing to expansion for the US, and with most stock markets rallying or near record highs, the reports suggest the world economy is in a brighter spot.

“The strength of this morning’s data from China and the euro zone offers some encouragement that there is some momentum building for the global economy at the start of the third quarter,” Mark Wall at Deutsche Bank said.

“We still don’t have second-quarter growth numbers for the US or euro zone. And although the Bundesbank said earlier this week that German growth could stagnate in the second quarter, what is at least encouraging from the PMI data is that it seems any disappointment yet to be published might well be temporary.”

Markit’s manufacturing PMI for the US due later yesterday was also expected to show improving activity. Analysts predicted a rise to 57.5 from 57.3 last month.

The PMI data coincided with the latest poll on the outlook for Asia, which suggested China will struggle to maintain these rates of growth into next year, partly because of risks a property market downturn might threaten the economy.

Analysts polled expect the second-biggest economy to expand by 7.4 percent this year, slightly below the last reported rate of 7.5 percent. That would be its weakest growth in almost a quarter of a century.

Some analysts say that more stimulus may be needed to offset any downdraft from falling property prices and activity. There are also increasing risks in the financial system, such as deteriorating credit quality.

Chinese stocks jumped after the PMI report, while shares in the rest of Asia edged higher. The Australian dollar hit a three-week high on prospects of stronger exports to China.

For the euro zone, where forecasters are more gloomy about growth prospects, the latest PMI data were a bright spot and triggered a rally in the euro from an eight-month low.

Markit said the data suggested quarterly economic growth of 0.4 percent in the current quarter, if a similar pace was maintained over the next two months.

Lagging economies like Spain performed even better, with the largest monthly rise in business activity recorded since August 2007, accompanied by a similar surge in new orders growth. – Reuters