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Global economy starts second half on solid footing: PMIs

China's factory activity expanded at its fastest in 18 months in July as new orders surged while the euro zone's private sector also perked up, suggesting the global economy started the second half of 2014 on a solid footing.

While China is relying on increased government stimulus to steer its economy away from reliance on exports and towards consumer spending, Europe has taken the opposite approach, combining fiscal austerity with near-zero interest rates.

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The latest HSBC/Markit Flash China Manufacturing Purchasing Managers' Index suggested that government stimulus was working, rising to 52 in July from 50.7 in June, and beating the consensus forecast of 51 in a Reuters poll.

PonyWang | E+ | Getty Images

That was the highest reading since January 2013, and well above the 50-point level that separates growth from contraction for the second consecutive month.

A comparable survey of private sector activity in the euro zone also rose more than expected, to 54.0 from 52.8, even without signs of the resurgence in inflation from dangerously low levels that the European Central Bank is trying to engineer.

Taken together with data pointing to a solid expansion for the United States, and with most stock markets rallying or near record highs, the reports suggest the world economy is in a brighter spot.

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"The strength of this morning's data from China and the euro zone offers some encouragement that there is some momentum building for the global economy at the start of the third quarter," said Mark Wall, European economist at Deutsche Bank.

"We still don't have second quarter growth numbers for the U.S. or euro zone. And although the Bundesbank said earlier this week that German growth could stagnate in the second quarter, what's at least encouraging from the PMI data is it seems any disappointment yet to be published might well be temporary."

Markit's manufacturing PMI for the United States is due later on Thursday and is also expected to show improving activity, rising to 57.5 from 57.3 last month.

China outlook still shaky

The PMI data coincided with the latest Reuters poll on the outlook for Asia, which suggested China will struggle to maintain these rates of growth into next year, partly because of risks a property market downturn might threaten the economy.

Analysts polled by Reuters expect the world's No. 2 economy to expand by 7.4 percent this year, slightly below the last reported rate of 7.5 percent. That would be its weakest growth in nearly a quarter of a century.

Some analysts say that more stimulus may be needed to offset any downdraft from falling property prices and activity. There are also increasing risks in the financial system, such as deteriorating credit quality.

Mainland China stocks jumped after the PMI report while shares in the rest of Asia edged higher. The Australian dollar hit a three-week high on prospects of stronger exports to China.

For the euro zone, where forecasters are even more gloomy about growth prospects, the latest PMI data were a bright spot and triggered a rally in the euro from an eight-month low.

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Markit said the data suggest quarterly economic growth of 0.4 percent in the current quarter if a similar pace is maintained over the next two months.

Lagging economies like Spain performed even better, with the largest monthly increase in business activity recorded since August 2007 accompanied by a similar surge in new orders growth.

Separate official data showed Spain's jobless rate tumbled to its lowest in two years, although nearly a quarter of the labor force is still out of work.

And while euro zone services business expanded at its fastest pace since May 2011the PMI rose to 54.4the index measuring output price changes fell to 48.3, suggesting downward pressure on inflation, despite high raw materials costs.

With inflation stuck at 0.5 percent in June, far into the ECB's "danger zone" below 1 percent, and well short of its 2 percent target, that suggests policymakers still face a tough task to thwart the threat of deflation.

"There's so much spare capacity that deflation remains a bigger risk at the moment," said Chris Williamson, Markit's chief economist. "Companies simply cannot push through cost increases to consumers at this point."

Existing home sales jump for third straight month

Separate official data showed British retail sales were the strongest in 10 years over the second quarter, even though they stagnated in the latest month.

While the Bank of England and the U.S. Federal Reserve are expected to raise interest rates from record lows in the first half of next year, the latest Reuters poll found that rates are expected to remain steady in most of Asia for the rest of 2014.

New Zealand's central bank lifted its official cash rate by 25 basis points to 3.50 percent as expected on Thursday, but said it would suspended its campaign of rate rises and take time out to measure how they have affected the economy.

By Reuters

Contact World Economy

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