The recovery in Europe is picking up momentum while China seems to be going in the opposite direction as the world economic order shifts in a surprising way.
Markit’s Flash Eurozone Composite Purchasing Managers Index (PMI), a closely watched gauge of overall business activity, expanded at its fastest pace for two and a half years in January, indicating that the region’s recovery might be less fragile than advertised.
At the same time, Chinese manufacturing actually shrank while the U.S. manufacturing output lost some momentum, but was still on the uptick. The figures suggest that, after five years of recession and slow growth in Europe and the United States, economic momentum is finally going in the developed world’s favour.
The euro zone’s overall PMI index hit 53.2 in January, well ahead of forecasts, up from 52.1 in December. Any figure above 50 indicates expansion; any figure below indicates contraction.
Export-led manufacturing was the star. The reading for that sector hit a healthy 53.9, against a reading of 51.9 for the services sector. Germany drove the higher figure. A note by the economists at French bank Société Générale said the PMI figures suggest German manufacturing is “on fire,” with the highest reading since May, 2011. “The survey confirms that the German recovery is gaining strength, [but] that the divergence between Germany and the rest of the euro area is increasing.”
The divergence was highlighted by France’s showing in the Markit survey. While its manufacturing PMI improved in January, it was still in contraction territory, with a PMI of 48.8. That figure along with generally weak confidence figures point to slow growth in the euro zone’s second-biggest economy. A flash estimate for Italy, the euro zone’s third-largest economy, was not available though its gutted manufacturers have been showing some signs of life.
ING Financial Markets economist Martin van Vliet said the PMI data show “that the Euro zone economy started 2014 on a positive footing. … But we should not get too carried away; the still moderate level of the overall index is a reminder that this recovery is still in its infancy and fragile.”
Factory activity in China contracted in January for the first time in six months. The Markit/HSBC PMI fell to 49.6 that month from December’s 50.5.
Quoted in a Reuters story, Dariusz Kowalczyk, senior economist at Crédit Agricole CIB in Hong Kong, said, “Such a reading highlights the deteriorating growth outlook as policy makers are tightening their monetary stance, pushing through with an austerity campaign and withdrawing stimulus measures.”
Mr. Kowalczyk said the Chinese PMI reading points to a “further slowdown in manufacturing and the entire economy” in the second quarter. He expect Chinese growth to come in at 7.2 per cent this year, which is below the consensus estimate.
The American manufacturing numbers were slightly stronger than Europe’s, based on Markit’s preliminary reading, but indicated slowing growth. In January, the manufacturing figure fell to 53.7 from December’s 55, the first downturn in three months. Economists, however, said they still believed the U.S. manufacturing recovery was still well intact, with about 10,000 new manufacturing jobs being added each month.
Société Générale said the euro zone’s strong January PMI figure is consistent with year-on-year growth of 1.4 per cent in 2014, which is well above the consensus figure of 1 per cent. The data comes as increasingly bullish European economic news emerges.
Britain’s unemployment rate is falling far faster than Bank of England and many economists had expected. On Thursday morning, the new Spanish unemployment figure was stable at 26 per cent, indicating the jobless rate may be at its peak. The Bank of Spain on Thursday estimated growth at 0.3 per cent in the fourth quarter of 2013 over the previous quarter.
While the Spanish recovery is tentative – youth unemployment is still rising and both exports and imports slackened in the final months of 2013 – there seems little doubt that it has left its long, grinding recession behind.
“Europe’s economy is growing again and its recovery is now spreading from exports to domestic demand, too,” ECB president Mario Draghi said in an interview published Thursday in the Swiss-German newspaper Neue Zuercher Zeitung.