Euro zone stumbles after China surges

Written by Reuters | London, Beijing | Updated: Jun 3 2014, 17:30pm hrs
Signs of an economic revival in China have raised hopes that Beijings targeted measures to bolster growth are having an impact but a slowdown in the euro zone will increase expectations of policy easing there.

Chinese factory activity expanded at the fastest pace in five months in May but euro zone manufacturing growth slowed more than initially thought, fuelling expectations that the European Central Bank will ease policy this week.

The Chinese numbers were fractionally higher. We are beginning to make some progress but it is consistent with this story that the Chinese economy is not going to grow as fast as it has in the past, said Peter Dixon at Commerzbank.

The European numbers were in and around the ballpark. Its not the kind of data the ECB is going to react to instantly but it is part of a bigger puzzle that says we need more growth in Europe.

US manufacturing growth probably accelerated in May, a report from the Institute for Supply Management (ISM) is expected to show later on Monday.

Markits final Manufacturing Purchasing Managers Index (PMI) for the euro zone slipped to a six-month low of 52.2 in May from Aprils 53.4 as strong figures from Germany failed to offset a contraction in activity in France.

The final number was below the initial reading of 52.5 but held above the 50 mark that separates growth from contraction for the 11th straight month. A subindex measuring output sank to 54.3 from 56.5, weaker than the initial reading of 54.7.

The slowdown in euro zone manufacturing activity in May reinforces belief that the ECB will deliver a package of measures at its 5 June policy meeting, said Howard Archer at IHS Global Insight.

To spur growth, boost lending and drive up inflation the ECB is widely expected to cut its deposit rate to below zero, reduce its main borrowing rate and launch a refinancing operation aimed at businesses when it meets on Thursday.

Inflation in the 18 nations using the euro is predicted to have held steady at just 0.7% in May, well within the ECBs danger zone of below 1% and also below its preferred 2% ceiling.

A key measure of German inflation, due later on Monday, is expected to have fallen in May.

Germany is Europes largest economy and again supported the tepid overall growth but in France, the blocs second-largest, the PMI sank back below the 50 mark after just two months of expansion.

In non-euro using Britain manufacturing activity kept expanding at a rapid pace in May, suggesting the economic recovery has lost little of its shine this quarter.

The reassuring Chinese factory data and another record high for Wall Street lifted world stocks and commodities on Monday, although markets are waiting to see how far the ECB will go with policy easing plans.