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Euro zone risks return to contraction, China outlook smoggy

The new European Central Bank (ECB) headquarters are pictured in Frankfurt, November 22, 2014. REUTERS/Kai Pfaffenbach

By Jonathan Cable and Rodrigo Campos

LONDON/NEW YORK (Reuters) - The euro zone economy may face another contraction after business activity grew less than expected in November, although although Asian readings were more upbeat, while U.S. data was mixed in global surveys published on Wednesday.

Firms across the euro zone cut prices again which may concern the European Central Bank which holds a policy meeting on Thursday. [ECB/INT]

In contrast, a survey covering China's services sector showed slightly faster expansion, but after data on Monday suggested manufacturing growth was its weakest in at least six months, investors remain concerned that Chinese economic growth is slowing.

"There are clear downside risks to various areas of the world economy including the euro zone and to some extent China," said Philip Shaw, chief economist at Investec. "The euro zone numbers do indicate the economy is moving forwards but at a snail's pace, (and) the pressure remains on the ECB."

Markit's final November Composite Purchasing Managers' Index (PMI), based on surveys of thousands of companies across the euro area and seen as a good indicator of growth, sank to 51.1 from October's 52.1.

November was the 17th month the index has been above the 50 level that separates growth from contraction, but the new business index fell below that mark for the first time since the middle of last year, suggesting a further downturn in December.

"The region is on course to see a mere 0.1 percent GDP growth in the final quarter of the year, with a strong likelihood of the near-stagnation turning to renewed contraction in the new year unless demand shows signs of reviving," said Chris Williamson, Markit's chief economist.

A Reuters poll last month for the euro zone predicted 0.2 percent economic growth this quarter and 0.3 percent next. (EUGDPQ)

The Markit PMI covering the euro zone's dominant service industry fell to 51.1 from October's 52.3 and showed firms have been cutting prices for three full years now to drum up business.

The ECB is offering banks long-term cheap loans and buying covered bonds and asset-backed securities. But facing resistance from Germany, there is only an even chance it will buy government bonds, a Reuters poll found last week.

Conversely, the Bank of England is expected to begin tightening policy next year and after a survey showed its services sector expanded more than expected last month, recently revised forecasts for a later hike may be brought back in.

The data will be welcomed by Finance Minister George Osborne who gives a half-yearly update on official growth and borrowing forecasts later on Wednesday, his penultimate such statement before May's national election.


China's official non-manufacturing PMI rose to 53.9 in November from 53.8 while a separate services PMI published by HSBC/Markit inched up to 53.0 last month from October's 52.9, as new orders rose at their quickest pace in 2-1/2 years.

But the surveys painted a mixed picture of the labour market, which Chinese leaders say is a crucial consideration when setting policy. Along with Monday's news, that prompted some economists to predict China would cut interest rates again in coming months after doing so unexpectedly on Nov. 21.

"Things have gotten worse rather than better," said Louis Kuijs, an economist at RBS in Hong Kong, adding that any bottoming out in China's sagging housing market is unlikely to lead to a solid rebound next year.

"I predict one more rate cut to lower lending rates to 5.25 percent in the first quarter," he said.

In other upbeat data from the region, activity in India's services industry expanded at its fastest rate in five months although the outlook was clouded by tumbling confidence.


In the U.S., the monthly pace of growth in the U.S. services sector slowed in November to its lowest level since April, according to data from Markit on Wednesday.

The final November services sector PMI slipped to 56.2 in November from 57.1 in October.

"The slowing is still only modest, and leaves the economy growing at its approximate long-term trend rate," Markit chief economist Chris Williamson said.

Markit's final November U.S. composite PMI, a weighted average of its manufacturing and services indexes, dipped to 56.1 last month from 57.2 in October. It matched the preliminary estimate.

An alternative gauge of growth in the U.S. services sector from the U.S. Institute of Supply Management (ISM) rose to 59.3 last month, just below the post-recession high of 59.6 hit in August, from 57.1 in October. The November figure came above economists' forecasts for a reading of 57.5, according to a Reuters poll.

(Additional reporting by Koh Gui Qing in Beijing; Editing by Catherine Evans and Clive McKeef)