Business growth slows in Europe and China, with Russian sanctions still to bite

Thursday 21 August 2014 12.37
Euro zone's Composite Flash PMI fell to 52.8 in August from July's 53.8
Euro zone's Composite Flash PMI fell to 52.8 in August from July's 53.8

Business growth in China and across Europe slowed this month, surveys showed today, providing more evidence that the world economy is stuttering and may need more monetary stimulus to keep it going. 

Euro zone private business activity expanded slower than expected in August, despite widespread price cutting. 

This is before the full effects of sanctions imposed on and by Russia over Ukraine are felt. 

Meanwhile, China's manufacturing activity hit a three-month low in August and a Reuters poll showed Japan's economic recovery is likely to be modest despite a small acceleration inthe factory sector. 

Markit's Composite Purchasing Managers' Index (PMI) for the euro zone will provide gloomy reading for the European Central Bank (ECB) as it showed the big two economies of Germany and France struggling. 

Based on surveys of thousands of companies across the region and a good indicator of overall growth, the Composite Flash PMI fell to 52.8 from July's 53.8.

This was far short of expectations in a Reuters poll for a modest dip to 53.4. 

However, readings above 50 do indicate expansion and Markit said the data point to third-quarter economic growth of 0.3%, matching predictions from a Reuters poll last week. But there are challenges facing the economy now that it didn't have to worry about a few months ago. 

Europe and others in the West imposed economic sanctions on Moscow over the Kremlin's support for rebels in eastern Ukraine, prompting a tit-for-tat response from Russian President Vladimir Putin. Companies in Europe are beginning to show signs of strain. 

Germany's Adidas, the world's number-two sportswear firm, cut its profit target due to the rouble's fall and increasing risks to Russian consumer sentiment. Brewer Heineken said its sales volume in Russia fell by a"low-double digit" percentage. 

The composite PMI in Germany - Russia's biggest trade partner in the European Union which has already seen exports to the country plunge in the first half of the year - fell to 54.9 from 55.7. 

For France, the euro zone's second largest economy, the Composite PMI rose from 49.4 to the break-even mark at 50, meaning it is neither expanding nor contracting. 

In the UK, which does not use the euro, consumers have been the main driver of the country's economic recovery which began last year. But retail sales rose in July at a weaker pace than expected.

Asian economies stumble

The PMI for Japan showed factory activity accelerated in August as export and domestic demand increased, in another sign the economy is steadying after shrinking in the second quarter due to a sales tax increase. 

But the Reuters Tankan survey indicated the economic recovery is likely to be modest, which could keep pressure on the central bank to act to sustain growth in the world's third largest economy. 

Meanwhile, HSBC/Markit's Flash China Manufacturing PMI fell to 50.3 in August from July's 18-month high of 51.7, badly missing a Reuters forecast of 51.5 but just above the 50 threshold. 

A burst of policy stimulus since April lifted China's annual economic growth to 7.5% in the second quarter - in line with the full-year official growth target - from 7.4% in the first quarter - the weakest pace in 18 months. 

But with conditions looking increasingly unsteady into the third quarter as policy support moderated, some analysts say even more stimulus may be needed in coming months to bolster growth and offset the downdraft from the housing market. 

Similarly, no action is expected from the ECB in the coming months as it waits to see what effect another round of temporary access to cheap cash for banks has on inflation and growth. 

Consumer prices in the euro zone rose just 0.4% on the year in July, the weakest annual rise since October 2009 at the height of the financial crisis, and well within the ECB's"danger zone" of below 1%.
According to the composite output price index, firms cut prices for the 29th month - and at a faster rate than in July.