China, euro zone PMI data suggest strong start to H2

Written by Reuters | Updated: Jul 25 2014, 08:05am hrs
Chinas factory activity expanded at its fastest pace in 18 months in July as new orders surged while the euro zone's private sector also perked up, suggesting the global economy started the second half of 2014 on a solid footing.

While China is relying on increased government stimulus to steer its economy away from reliance on exports and towards 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 suggested that government stimulus was working, rising to 52 in July from 50.7 in June, and beating the consensus forecast of 51 in a Reuters poll.

That was the highest reading since January 2013, 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 54.0 from 52.8, even without signs of the resurgence in inflation from dangerously low levels that the European Central Bank is trying to engineer.

Taken together with data pointing to a solid 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 PMI data coincided with the latest Reuters 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.

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

Separate official data showed Spains jobless rate tumbled to its lowest in two years, although nearly a quarter of the labour force is still out of work.

And while euro zone services business expanded at its fastest pace since May 2011 the PMI rose to 54.4 the index measuring output price changes fell to 48.3, suggesting downward pressure on inflation, despite high raw materials costs.

With inflation stuck at 0.5% in June, far into the ECBs danger zone below 1%, and well short of its 2% target, that suggests policymakers still face a tough task to thwart the threat of deflation.

Theres so much spare capacity that deflation remains a bigger risk at the moment, said Chris Williamson, Markits chief economist.

Separate official data showed British retail sales were the strongest in 10 years over the second quarter, even tho-ugh they stagnated in the latest month.