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World economy struggling to gain traction

21 February 2014, 08:29

London - Another month of slower factory activity in China and a sharp decline in a closely-watched gauge of US manufacturing on Thursday added to concern about the state of the global economy.

Surveys also showed business activity across the 18-country eurozone slowed this month, confounding expectations of an acceleration. The data weighed on global stock prices.

Activity in China's vast factory sector fell to a seven-month low of 48.3 this month from 49.5 in January, according to the flash Markit/HSBC purchasing managers' index, though some analysts cautioned against reading too much into the report, which was affected by the Lunar New Year holiday.

Even so, the sub-50 reading indicated a contraction in the sector and reinforced worries that the world's second largest economy was slowing down, which could have knock-on effects in emerging markets and the European Union.

"We had poor data from China but the question there is how impactful the deleveraging (there) will be," said Paul Zemsky, head of asset allocation at ING Investment Management in New York. "This would indicate it is deflating slowly, which is not bad, but they're a big economy and we need it to grow."

Fears that the US economy had lost some momentum in the new year after a strong finish to 2013 were reinforced by a decline in the Philadelphia Federal Reserve Bank' business activity index to -6.3 from 9.4 in January. A reading above zero indicates expansion in the region's manufacturing.

The survey is one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

Some attributed the sharp decline to recent severe winter weather, but that did not dispel concerns entirely.

"This number is a disaster," said Douglas Borthwick, a managing director at Chapdelaine Foreign Exchange. "While weather may have played a part, it comes on the back of horrible durable goods, payroll, retail sales and housing" data.

A separate index from Markit, however, showed factory activity across the United States accelerated at its quickest pace in nearly four years in early February, handily beating expectations in a Reuters poll as new orders increased.

Zemsky said that data may have been impacted by short-term factors but added "it certainly is a good number."

The eurozone may have the most to worry about, said Lena Komileva, economist at G+ Economics.

The economic bloc, she said, "is most at risk of a global demand shock given the chills emanating from China's deleveraging across emerging markets, North America's current 'frozen' growth patch and the fact that the US is exporting less of its growth to the rest of the world."

Markit's Eurozone Composite PMI, which is based on surveys of thousands of companies and considered a good guide to growth, dipped to 52.7, below January's 31-month high of 52.9.

That missed expectations in a Reuters poll for a modest rise to 53.1 but marked the eighth straight month the index has been above the 50 level.

"The story behind the euro zone PMIs remains one of an increasingly fragile recovery under way amid growing divergence between the union's largest economies, global growth headwinds and persistent euro strength," Komileva said.

The overall index masked news France is lagging far behind its European peers, pouring cold water on hopes for a recovery there that had gathered momentum after its economy expanded 0.3% in the fourth quarter.

Still, Markit said the latest data point to 0.5 percent economic growth in the bloc this quarter, stronger than the 0.3% predicted in a Reuters poll published last week.

The region still faces falling prices, however, with inflation dropping unexpectedly to just 0.7% in January,

That has increased pressure on the ECB to consider new policy measures to support a recovery that appears to be running out of steam.

- Reuters

Tags economy

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