Euro zone economy leading the way as China struggles

[March 24, 2015] By Jonathan Cable

LONDON (Reuters) - Euro zone businesses ramped up activity this month, just as the European Central Bank starts printing money to spur growth and inflation, while a slowdown among Chinese factories has fueled calls for more stimulus there.

A disappointing Chinese survey of manufacturing added to signs the world's second biggest economy has lost momentum despite two interest rate cuts since November, alongside other policy easing measures.

By contrast, Tuesday's surveys showed signs of an economic pickup in the troubled euro zone, just as ECB policymakers unleash a roughly 1 trillion euro quantitative easing plan.

"I wouldn't want to give QE too much credence at this stage. The ECB has only been buying for a couple of weeks and QE takes a long time to have any impact - if at all," said Peter Dixon at Commerzbank.

"The outright QE itself has had zero impact, growth was already happening."

Markit's Eurozone Composite Flash Purchasing Managers' Index (PMI), based on surveys of thousands of companies and seen as a good growth indicator, jumped to a near four-year high of 54.1 from February's 53.3.
 

That beat the highest prediction in a Reuters poll - well above the median forecast for a modest rise to 53.6 - and was its 21st month above the 50 level that separates growth from contraction.

The surveys pointed to first-quarter growth of 0.3 percent, Markit said, matching the previous three months but shy of the 0.4 percent median forecast in a Reuters poll taken earlier this month.

A sub-index measuring prices charged rose to an eight-month high of 49.0, but it has now spent three years below the breakeven level, suggesting inflation won't be making any sudden leaps from February's -0.3 percent.

Oil prices have tumbled over the past nine months and inflation rates across the world have followed suit. Data from Britain earlier on Tuesday showed prices didn't move last month for the first time on record.

With little, if any, upward pressure on prices economists may push further back forecasts for when the Bank of England - which was once expected to be the first major central bank to tighten policy - finally hikes borrowing costs.

"The risks to our inflation calls are firmly on the downside, which raises the risk that the BoE delays rate hikes even further," said Rob Wood at Berenberg Bank.

European shares and the euro edged up after the surveys but the slowdown in China kept oil and commodities-linked assets under pressure.

A similar survey due later on Tuesday is expected to show a slight tick down in factory growth in the United States, the world's biggest economy.

CHINA BRAKES

China's flash HSBC/Markit PMI dipped to 49.2 in March, confounding the expectations of economists polled by Reuters who had forecast a very modest dip to 50.6 from February's final PMI of 50.7.

Some analysts already expected first-quarter economic growth to slip below the government's new full-year target of 7 percent - widely seen as the level needed to keep employment steady.

"The deteriorating PMI confirmed that downside risks to China's 2015 growth have started to materialize. We expect an accelerated monetary easing cycle and somewhat loosening of the fiscal stance," said Jian Chang at Barclays.

China's economy faces increased downward pressure this year but the slowdown is stabilizing, with employment and services among the bright spots, Vice Premier Zhang Gaoli said on Sunday.

The country's leaders have said they would be willing to tolerate somewhat slower growth as long as the labor market remained resilient, but the latest PMI employment sub-index contracted for a 17th straight month, hitting its lowest since the depths of the global financial crisis.

(Additional reporting by Kevin Yao in Beijing Editing by Jeremy Gaunt.)
 

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