News Column

Global economy starts second half on solid footing

July 25, 2014

CHINA'S factory activity expanded at its fastest in 18 months this month as new orders surged, while the euro zone's private sector also perked up, suggesting the global economy |started the second half of this year 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 (PMI) suggested that government stimulus was working, rising to 52 this month from 50.7 last month.

That was the highest reading since January last year, 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 strength of this morning's data from China and the euro zone offers some encouragement that there is some momentum building for the global economy at the start of the third quarter," said Mark Wall, European economist at Deutsche Bank.

Markit's manufacturing PMI for the US is also expected to show improving activity, rising to 57.5 from 57.3 last month.

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.

Analysts expect the world's number two economy to expand by 7.4 percent this year, slightly below the last reported rate of 7.5 percent.

Some analysts say that more stimulus may be needed to offset any downdraft from falling property prices and activity.

There are also increasing risks in the financial system, such as deteriorating credit quality.

Mainland China stocks jumped after the PMI report while shares in the rest of Asia edged higher.

The Australian dollar hit a three-week high on prospects of stronger exports to China.

For the euro zone, where fore-|casters are even more gloomy about growth prospects, the latest PMI data was a bright spot and triggered a rally in the euro from an eight-month low.

Markit said the data suggest quarterly economic growth of |0.4 percent in the current quarter if a similar pace was maintained over the next two months.

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. - Reuters

Cape Argus

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Source: Cape Argus (South Africa)

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