The global economy started the second half of the year on shaky ground with China's factory sector activity contracting in July at the fastest pace in 15 months and euro zone manufacturing weaker than expected, although US activity picked up.

The purchasing managers indices (PMI) for the manufacturing sector from private data vendor Markit come after Beijing said it would allow its yuan currency to fluctuate more widely within its trading band as a way to support trade and despite the European Central Bank's 60 billion euro a month bond-buying programme.

CHINA PMI LOWEST SINCE APRIL 2014

The preliminary Caixin/Markit China PMI for July dropped to 48.2, the lowest reading since April last year. It was the fifth straight month under the 50 level separating expansion from contraction.

The fall confounded forecasts for a rise to 49.7 from June's final reading of 49.4 and pushed the Australian dollar to a six-year low. China is Australia's biggest export market.

Fears of faltering demand in China, the world's largest commodity buyer, put pressure on other commodity prices, with copper falling to its lowest level since 2009.

The survey of executives in over 420 Chinese manufacturing firms found output, new orders and export orders all decreased.

"Today, it's big, bad news with this number well below consensus," said analyst Helen Lau of Argonaut Securities in Hong Kong. "It shows there's no signs of recovery in small and mid-sized business in China, but I think it's also related to the summer weak season for demand."

The China survey overshadowed better news from Japan, where the flash Markit/Nikkei PMI rose to a seasonally adjusted 51.4 in July from a final 50.1 in June, a welcome hint of economic acceleration after a surprise slowdown last quarter.

The ongoing factory output contraction reflected in Friday's China survey is likely to fuel speculation that Beijing will accelerate the pace of loosening monetary policy to try to stoke activity in the wake of the recent China stock market slump.

Economists polled by Reuters this month said they expect China to reduce interest rates by 25 basis points before year-end. The amount of cash that Chinese banks must hold as reserves was also expected to be reduced to keep the Chinese economy growing at seven per cent this year, the slowest pace in a quarter of a century.

"The central bank will maintain its loose monetary policy in the second half this year, and it will continue to apply different methods to control liquidity," Zhu Haibin, economist at JP Morgan in Beijing, said on Wednesday.

EUROZONE SLUGGISH

Euro zone business activity started the second half on a less secure footing than expected as euro weakness failed to boost export demand.

Markit's Composite Flash Purchasing Managers' Index, based on surveys of thousands of companies and seen as a good guide to growth, fell to 53.7 in July from June's four-year high of 54.2. A Reuters poll had predicted a more modest dip to 54.

The Markit PMI for the euro zone service industry fell to 53.8 from June's 54.4, well short of the expected 54.2, while the factory PMI also missed the median forecast for no change, dipping to 52.2 from 52.5.

Greece's debt default meant July was a turbulent month for the euro zone, however, and Chris Williamson, chief economist at Markit, said the readings could have been worse.

"Amongst all that tension, the fact it has held up at a reasonable rate of growth is pretty encouraging," Williamson added. "More recently there have been positive developments, so we may see some upturn in growth next month."

The headline index for the euro zone has nevertheless been above the 50 level that separates growth from contraction since mid-2013.

Williamson said the data provisionally pointed to third- quarter growth of 0.4 per cent, slightly weaker than the 0.5 per cent predicted in a Reuters poll published on Thursday.

"While the latest data suggest that the Greek crisis has not derailed the euro zone recovery altogether, growth seems to be slowing as the boosts from earlier falls in oil prices and the euro exchange rate fade," said Jennifer McKeown, at Capital Economics.

The euro has sunk more than nine per cent against the US dollar this year, making the bloc's goods cheaper abroad.

US MANUFACTURING IMPROVES

Growth in the US manufacturing sector edged up in July after slowing for three months in a row, according to Markit.

The preliminary US Manufacturing Purchasing Managers' Index rose to 53.8 in July from a final June reading of 53.6, which was the slowest pace since October 2013. Economists polled by Reuters had forecast the July figure at 53.6.

"A modest upturn in the headline manufacturing PMI belies some more worrying undercurrents which point to potential weakness in coming months," said Markit's Williamson. - Reuters