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Euro zone starts 2014 on a high, China falters

London's financial district is seen behind the Thames Barrier late afternoon December 1, 2013. REUTERS/Russell Boyce
London's financial district is seen behind the Thames Barrier late afternoon December 1, 2013. REUTERS/Russell Boyce

By Jonathan Cable and Steven C. Johnson

LONDON/NEW YORK (Reuters) - China's vast manufacturing industry shrank for the first time in six months and U.S. factory growth slowed a bit this month, but Europe's private sector got the new year off to a strong start, surveys on Thursday showed.

The mixed results suggested global growth would remain uneven in early 2014, particularly as China's economy - the world's second largest - settles into a slower rate of growth.

Weaker domestic and overseas demand in January hurt Chinese factory output and drove the Flash Markit/HSBC purchasing managers' index to 49.6, its first contraction in six months, from 50.5 in December. A reading above 50 indicates growth.

"(The Chinese PMI) is consistent with the idea that China has shifted to a lower growth path, which is exactly in line with what the government is calling for. Is it a concern? Not at this stage. It's a bit of a warning signal but that's it," said Peter Dixon at Commerzbank.

In most of the 18 countries that use the euro, however, surveys showed stronger growth. Markit's Flash Eurozone Composite Purchasing Managers' Index (PMI), which gauges business activity across thousands of companies, jumped to 53.2 in January from 52.1 last month. That was its highest since mid-2011, beating all forecasts in a Reuters poll.

Only France bucked the overall euro zone trend. The French composite PMI showed business activity contracted this month.

"The euro zone economy started 2014 on a positive footing, which is encouraging news and will reinforce hopes of a sustained recovery this year," said Martin van Vliet at ING.

U.S. manufacturing, which had picked up steam in the second half of 2013, lost a bit of momentum this month. Financial data firm Markit said weaker output and new orders were the main drivers behind the decline in its preliminary U.S. Manufacturing PMI to 53.7 from 55.0.

Even so, the rate of overall growth remained "reassuringly robust," according to Markit chief economist Chris Williamson, who added that output growth of around 2 percent per quarter was generating about 10,000 new manufacturing jobs a month.

If employers across the country resume adding jobs at a healthy clip this month, that should encourage the Federal Reserve to press ahead with winding down its monetary stimulus.

The most recent nonfarm payrolls data showed 74,000 new jobs were created in December, well below the 203,000 added in November. Economists, however, expect the December figure was an anomaly caused partly by unusually cold weather.

NEW YEAR HAPPY FOR EUROPE, SOMBER IN CHINA

Euro zone growth remains far behind that in the United States, though Markit said the economy could expand by 0.3-0.4 percent in the first quarter if PMIs hold near January levels.

That is stronger than the 0.2 percent suggested in a Reuters poll last week.

Ireland and Spain both drew strong demand for bonds in auctions this month, while European shares climbed to fresh 5-1/2 year peaks on Tuesday as investors grow more bullish.

China's annual economic expansion, meanwhile, slowed to 7.7 percent in the fourth quarter of 2013 from 7.8 percent in the previous quarter, putting full-year growth at 7.7 percent, slightly ahead of the government's target of 7.5 percent.

Leaders in Beijing have pledged to push reforms to unleash new growth drivers as the economy loses steam, burdened by industrial overcapacity, piles of debt and soaring home prices.

A recent Reuters visit to southern China's manufacturing heartland showed many factories have closed earlier than usual for the upcoming Lunar New Year, the nation's biggest holiday, discouraged by weak orders and rising costs.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.

Leaders in Beijing have pledged to push reforms to unleash new growth drivers as the economy loses steam, burdened by industrial overcapacity, piles of debt and soaring home prices.

Some economists say Chinese growth will slow further this year as officials undertake difficult reforms.

"Today's PMI figure reinforces our expectation of growth momentum easing further this year. We expect GDP growth to progressively slow towards the pain threshold of 7 percent later this year," said Nikolaus Keis at UniCredit.

(Additional reporting by Jonathan Standing and Kevin Yao in Beijing; Editing by Jeremy Gaunt and Chizu Nomiyama)

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