China leaps ahead as Europe ambles forward

LONDON (REUTERS) - Growth in Chinese manufacturing accelerated to a two-year high this
month, and a buoyant Germany took the euro zone economy a step closer to recovery.

Data to be reported later from the United States, however, is expected to show factory activity eased, after boosting production to a seven-month high last month.

HSBC's flash China PMI rose to 51.9 this month, the highest since January 2011. The earliest preview of China's economic health this year, the flash PMI is the latest indication that the world's second-largest economy is steadily recovering from a near two-year cool-down.

The euro zone data, meanwhile, supports European Central Bank (ECB) president Mario Draghi's assertion that the 17-nation currency union is benefiting from "positive contagion", though the data still hints at economic contraction in the first quarter as the downturn in France went the opposite direction to Germany and deepened.

Markit's flash composite euro zone purchasing managers' index (PMI), which surveys around 5,000 firms and is viewed as a good growth indicator, jumped to 48.2 from last month's 47.2, smashing expectations for a more modest rise to 47.5.

The index has now held below the 50 mark that separates growth from contraction in all but one of the last 17 months. But it is rising, prompting Markit to say the data suggests conditions in the bloc are improving but still consistent with GDP shrinking at a quarterly rate of about 0.2 per cent to 0.3 per cent.

"At this stage, the trajectory counts more than the absolute level, and here the main story is that the pace of recession is clearly easing," said Mr Marco Valli, chief euro zone economist at UniCredit.

"The drivers of the current and expected improvement remain the usual three: improving world trade - as shown by the further increase in the Chinese manufacturing PMI, slightly less fiscal tightening, and a less dysfunctional monetary policy."

The euro zone economy contracted in the second and third quarters of last year, meeting the general definition of recession. It is expected to have deepened at the end of last year.

A Reuters poll published on Wednesday predicted a 0.4 per cent contraction in the final months of last year and only a flat outlook for the current quarter, with tepid growth at best through to at least the middle of next year.

"While today's PMI data confirm that the steepest phase of the recession is now behind us, they still indicate that the euro zone economy is contracting," said Mr Martin van Vliet at ING. "That being said, an end to the recession may not be far off. Indeed, today's data clearly support the view that Germany might lead the euro zone out of recession in the first of half of this year."

The PMI data for Germany, Europe's largest economy and the bloc's growth engine, suggested its economy grew at its fastest pace in a year. But in neighbouring France, the euro zone's second biggest economy, conditions got a lot worse.

Germany's composite PMI rose to a 12-month high of 53.6 from last month's 50.3, while France's fell to 42.7 from 44.6 - its lowest since March 2009.

"The improvement in euro zone PMIs might be just a German story, a sign that the euro zone economy is far from being out of the woods," said Ms Annalisa Piazza at Newedge Strategy.

But there were signs that the global economy may be gaining some traction.

The rate of decline in new export orders for European goods eased to an 18-month low, while it stabilised in China. Indeed, the view that recovering growth in Asia will gradually overpower the political and economic malaise in the West was reason for optimism in the latest round of Reuters polls of more than 600 economists.

"Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China's ongoing recovery in the coming months," said HSBC's chief China economist Qu Hongbin.

HSBC said the sub-indices for output, new orders and employment that account for three quarters of the flash PMI all improved in January to hover above 50.

China's exports had a surprisingly strong spurt last month, contributing to the country's emergence from a protracted cool-down, though analysts worry the rebound would be short-lived on soft US and European demand.

On the other hand, analysts said the gentle up-swing in domestic activity appears to be sustainable and should drive China's economic recovery.

Markit's Flash U.S. Manufacturing PMI, due at 1358 GMT, is expected to have dipped to 53.0 from December's 54.0, according to a Reuters poll.

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