World economic recovery struggling to gain traction

Reuters
An employee works at a steel factory that exports to Europe and America in Jiaxing
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An employee works at a steel factory that exports to Europe and America in Jiaxing, Zhejiang province, …

By Jonathan Cable and Adam Rose

LONDON/BEIJING (Reuters) - China's vast factory sector contracted again this month and the expected acceleration in euro zone business activity failed to materialize, highlighting the fragile state of a global economy.

A survey out of China reinforced concerns of a minor slowdown in the world's second biggest economy while a sister index underscored an ongoing divergence between France, the bloc's second biggest economy, and the rest of the 18-member currency union.

"The euro zone is most at risk of a global demand shock given the chills emanating from China's deleveraging across emerging markets, North America's current 'frozen' growth patch and the fact that the U.S. is exporting less of its growth to the rest of the world," said Lena Komileva at G+ Economics.

Figures due later on Thursday from the United States are expected to show a marked easing of the pace of growth in its manufacturing industry.

The flash Chinese Markit/HSBC PMI fell to a seven-month low of 48.3 in February from January's 49.5, although some analysts cautioned against reading too much into the report, noting it was a shorter-than-usual snapshot.

Anything below 50 indicates a contraction.

"Today's poor PMI numbers add to the raft of survey and activity data showing that growth momentum in China is clearly slowing after having peaked last summer," said Nikolaus Keis at UniCredit.

"However, one should not read too much into a single number that may have been additionally depressed by the Lunar New Year holidays."

After the earlier disappointing surveys from China the yen, which often gains in line with investors' aversion to risk, got a leg up against its rivals but markets were little moved after European figures.

FLAGGING FRANCE

Markit's Eurozone Composite PMI, which is based on surveys of thousands of companies and is seen as a good guide to growth, dipped to 52.7, just below January's 31-month high of 52.9.

That missed expectations in a Reuters poll for a modest rise to 53.1 but marked the eighth month the index has been above the 50 level.

"The story behind the euro zone PMIs remains one of an increasingly fragile recovery under way amid growing divergence between the union's largest economies, global growth headwinds and persistent euro strength," Komileva said.

The overall index masked news France is lagging far behind its European peers, pouring cold water on hopes for a recovery gathering momentum in the country after it expanded 0.3 percent in the fourth quarter.

"All in all, it remains to be seen if the first quarter of 2014 will confirm the beginning of the French recovery or of a longer period of stagnation," said Julien Manceaux at ING.

Still, Markit said the latest data point to 0.5 percent economic growth in the bloc this quarter, stronger than the 0.3 percent predicted in a Reuters poll published last week.

But while the recovery across the euro zone appears fairly broad-based, with growth across private industry near 2-1/2 year highs, firms cut prices again to drum up trade, which may further stoke fears of deflation in the bloc.

A composite prices charged index showed firms have cut prices every month for nearly two years, suggesting inflation is not going up anytime soon.

Inflation dropped unexpectedly to just 0.7 percent across the euro zone in January, official data showed last month, well below the European Central Bank's 2 percent target ceiling.

Falling inflation has increased pressure on the ECB to consider fresh policy measures to counter deflation risks and support a fragile recovery that appears to be running out of steam.

But with few options available, having already slashed its main interest rate to near zero and given more than 1 trillion euros of cheap cash to banks for a three-year period, the ECB held policy steady when it met earlier this month.

(Editing by Alison Williams)

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