Warning signs for China, Fed hints at curbing stimulus
London, May 23, 2013
By Andy Bruce
Chinese factory activity shrank in May for the first time in seven months, overshadowing signs that the euro zone's downturn tempered slightly in May, business surveys showed on Thursday.
World stock markets tumbled after the Chinese data and also in response to US Federal Reserve chairman Ben Bernanke, who hinted on Wednesday the Fed could soon pare back its bond-buying with new money if the economy maintains momentum.
China's flash HSBC Purchasing Managers' Index (PMI) entrenched fears recovery in the world's No.2 economy has stalled, and augured poorly for global growth in the months ahead.
Even though the decline in euro zone businesses eased off a little, the PMIs showed a chronic lack of new orders will inhibit any meaningful recovery for some time.
While US data later on Thursday are expected to show manufacturing growth continued in the world's largest economy through May, that is unlikely to counter the uncertainty stemming from Bernanke's comments and the weak Chinese data.
The flash Chinese manufacturing PMI for May fell to 49.6 from 50.4 in April, slipping under the 50-point level demarcating expansion from contraction for the first since October.
"Hopes of a significant recovery (in China) are looking misplaced, but on the other hand the European numbers are slightly stronger than the consensus expected," said Andrew Kenningham, global economist at Capital Economics in London.
"So if you look at the global picture overall, it's slightly weaker than expected, but not dramatically so."
The downturn sharpens Beijing's policy dilemma over whether to act to stabilise activity, or tolerate an orderly slowdown while focusing on reducing the country's dependence on exports and investment for growth - changes that would bring longer-term benefits.
Yao Wei, economist at Societe Generale in Hong Kong, said the debate favours policy inaction from Beijing for now, as long as economic growth remains above 7 percent.
"We don't think it will trigger any cyclical policy move as long as the job market is fine," she said. "China is really on a path of structural deceleration. It's possible (to meet the growth target) but it's becoming increasingly difficult."
The data, coupled with hawkish comments from Bernanke, pulled MSCI's world equity index down 1.25 percent, with Japan's Nikkei index plummeting by more than seven percent.
The euro zone PMI suggested the bloc's economy is likely to contract again in the second quarter.
Markit's flash Eurozone Services PMI, which surveys around 2,000 companies ranging from major banks to caterers, rose in May to 47.5, a three-month high, from 47.0 in April.
While that was a little better than economists polled by Reuters expected, the PMI has now spent 16 straight months below the 50 mark that divides growth and contraction.
"We see this as confirmation of our expectation that the euro zone economy will end its downtrend in the spring," said Christoph Weil, analyst at Commerzbank.
"That said, a noticeable recovery is still not in sight; the economy will only grow slightly in the coming quarters and it will continue to feel like a recession."
Overall, survey compiler Markit said the surveys pointed to a similar economic performance in the second quarter as the 0.3 percent contraction the euro zone logged in the January-March period.
That is in stark contrast with the US, where there have been clear signs of growth, raising the prospect that the Federal Reserve could scale back its $85 billion in bond buys each month in its "next few meetings", according to Bernanke. - Reuters
More Analysis, Interviews, Opinions Stories
- Arab Spring boosts demand for bulletproof cars
- The age of genomic medicine dawns, finally
- Huge housing deal signals Gulf investment push into Egypt
- Syria healthcare system bleeds as newborns freeze to death
- Majority of women in news media suffer abuse
- Taking the strain out of Gulf-US flights
- Missing jet: Rarest of aviation disasters
- Middle East leads drilling boom
- New engine, new rules and new sound for F1 in 2014
- Qatar rift a pivotal test for GCC
- Lufthansa to offer in-flight movies on smartphones
- Gulf's rift over Qatar may slow investment, reforms
- GCC insurance industry on a stable footing
- Turning charisma into cash: Bernanke's 40 minutes
- 'Healthy' role for private sector needed
- Riyadh, Jeddah among world’s cheapest cities
- US oil export ban could be lifted piecemeal
- Bill Gates with $76bn is world's richest again
- Mideast leads global luxury shopping spend
- ME firms facing ‘record level of cyber attack’
- Clubbing business with leisure and community work
- $27bn capital shortfall facing regional banks
- Obama, wary of foreign crises, faces new Ukraine test
- The brief reign of bitcoin's top exchange
- Iran's fleet back in business as exports pick up
- New food labels to combat obesity
- Dubai says has learned lessons from crisis
- Mt Gox bitcoin customers' money 'virtually gone'
- Now, Bond-style Smartphone from Boeing
- Top trends in workforce management for 2014