Global economy starts second half on solid footing

Chinese factory index reaches 18-month high as the euro zone's private sector activity perks up, suggesting brighter prospects for the world

PUBLISHED : Friday, 25 July, 2014, 1:35am
UPDATED : Friday, 25 July, 2014, 5:21am

Chinese factory activity expanded this month at its fastest pace in 18 months as new orders surged while the euro zone's private sector also perked up, suggesting the global economy started the second half of the 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 suggests that government stimulus is working, rising to 52 this month from 50.7 last month, and beating the consensus forecast of 51 in a poll.

It is the highest reading since January last year and well above the 50-point level that separates growth from contraction for the second consecutive month.

The preliminary United States manufacturing purchasing managers' index was 56.3, down from last month's 57.3 and below analyst expectations for a reading of 57.5. The output subindex dipped slightly, to 60.4 from 61, a level that had been its highest since April 2010.

"The [US] data suggests the sector is growing at an annualised rate of roughly 8 per cent as we moved into the second half of the year," said Chris Williamson, the chief economist at Markit. "The growth rebound that the survey has signalled for the second quarter therefore looks to have been sustained into the third quarter."

A comparable survey of private sector activity in the euro zone also rose more than expected, to 54 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 PMI data coincided with a 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 second-biggest economy to expand 7.4 per cent this year, slightly below the last reported rate of 7.5 per cent. That would be its weakest growth in nearly a quarter of a century.

Some analysts say more stimulus measures 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.

Chinese stocks jumped after the PMI report and the Australian dollar hit a three-week high on prospects of stronger exports to China.

For the euro zone, where forecasters are even more gloomy about growth prospects, the latest PMI data triggered a rally in the euro from an eight-month low.