France drives euro zone business surge in June; China, Japan lag

By Sumanta Dey and Wayne Cole

(Reuters) - A resurgence of activity in France helped euro zone businesses expand at their fastest rate in four years this month, the clearest sign yet that the European Central Bank's stimulus is driving a solid recovery in the region.

But loose monetary policy in China and Japan failed to prevent factory activity there from contracting, Purchasing Managers Index (PMI) surveys showed.

Coming at a time when financial markets are transfixed by the stand-off between Greece and its creditors, the PMIs painted a mixed picture for the global economy and are likely to reinforce calls for accommodative monetary policy.

In the United States, where interest rates are set to rise by year-end for the first time in almost a decade, a survey later on Tuesday is expected to show factory activity in the world's biggest economy quickened in June.

The ECB is buying 60 billion euros of mostly sovereign bonds each month to boost growth and inflation in the euro zone. The latest data suggests that stimulus has started impacting business sentiment, even if only slightly.

"We've got a decent pickup in the services sector, which is indicative that domestic activity is beginning to rally," said Peter Dixon, economist at Commerzbank.

"It clearly does indicate that after all the travails of the past few years there are some positive shoots springing up in the euro zone. There are structural problems but maybe, just maybe, we've turned a corner."

Markit's Composite Flash Purchasing Managers' Index, based on surveys of thousands of companies and seen as a good growth indicator, surged to a four-year high of 54.1 from 53.5.

It pointed to second-quarter euro zone economic growth of 0.4 percent, Markit said, matching predictions in a Reuters poll. [ECILT/EU]

The bright readings for the euro zone were complemented by data for Germany and France, the bloc's two largest economies, where both factory and services activity grew much more than expected.

"There is a turnaround in the domestic (French) economy in particular," said Chris Williamson, chief economist at Markit.

"You've got a lot of ECB stimulus going on at the moment and we saw signs of that helping drive upturns in business and consumer confidence, and so that stimulus is paying dividends."

But the absence of price pressures in the surveys -- despite weaker currencies and rising global crude oil prices -- is likely to disappoint policymakers in Europe and Asia who are struggling to boost inflation.

Almost all the surveys out Tuesday showed factories and service companies continued cutting prices in June to attract new business.

After reaching a 13-month peak in May, demand from abroad for the euro zone's goods slowed slightly on concerns a Greek debt default could break up the monetary union.

Athens offered new budget proposals to its lenders on Monday which euro zone leaders welcomed, igniting hopes the long-running stand-off would soon end with a cash-for-reform deal to help Greece pays its debts.

Chinese firms reported the sharpest reduction in hiring intentions for six years, despite efforts by Beijing to kick-start activity through policy stimulus.

With factory activity apparently shrinking for three straight months, it is becoming mathematically harder for China to avoid economic growth falling below 7.0 percent in the second quarter for the first time since the Global Financial Crisis.

Hopes China would be the principal driver of global growth have dimmed as economists remain cautious about the outlook. Credit growth remains weak and manufacturing is stagnating, reinforcing views that authorities will have to roll out more stimulus to avert a sharper slowdown.

The news from Japan was no better. The factory sector actually went backwards in June, as the world's third largest economy continued to struggle after a recession last year.

(Editing by Catherine Evans)