GLOBAL ECONOMY-China factories falter, euro zone business wilts

Thu Mar 22, 2012 5:18pm GMT

* China manufacturing slumps for fifth month in a row

* Euro zone PMIs suggest worsening economy

* German, French factory PMIs worse than all forecasts

* Investors take fright at data (Adds analysis, FedEx warning on growth prospects, quotes)

By Andy Bruce and Nick Edwards

LONDON/BEIJING, March 22 (Reuters) - Chinese manufacturing activity shrank for a fifth straight month in March and the euro zone economy is showing new signs of wilting, according to surveys on Thursday that pointed to weakening global demand.

Only the United States is showing signs of vigor among the world's top economies, underlined by data showing jobless claims last week fell to a fresh four-year low.

That was reinforced earlier on Thursday by a report from the New York-based Conference Board showing its leading economic index climbed 0.7 percent during February. It was a fifth consecutive monthly rise, the best string of gains since the U.S. economy rebounded out of recession in 2009.

But analysts warned that U.S. momentum is at risk if the global economy keeps sliding.

"With much of Europe already slipping into recession, the U.S. economy will be pushing against significant external headwinds to accelerate in the quarters ahead," said Jim Baird, Chief Investment Strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Investors were unnerved by the reports from Asia and Europe, selling riskier assets such as stocks.

Thursday's batch of purchasing managers indexes suggested China and Europe will not contribute to a global upturn anytime soon.

Factory activity in China contracted for a fifth straight month in March, hit by declining order books, disappointing exports and new hiring hitting a two-year low.

By contrast, Thursday brought more evidence the U.S. jobs market is improving, with initial jobless claims falling by 5,000 to 348,000 last week - the smallest number since February 2008 - and topping expectations for a rise.

"The PMIs give a warning that even if the U.S. economy seems to be doing quite well, that doesn't necessarily translate to solid growth in every other part of the world," said Jonathan Loynes, an economist at Capital Economics in London.

China's slowdown partly reflects the weakness of economies in Europe, its single biggest export partner. The PMIs suggested a euro zone recession is now unavoidable.

Memphis, Tennessee-based FedEx Corp, whose delivery service spans the globe, included a warning with its earnings report issued on Thursday that tepid economic growth was causing it to scale back its outlook for the rest of this year.

"What we're seeing at the moment ... is we just don't have as strong an economy as we would have hoped it would be a year ago," Chief Financial Officer Alan Graf told analysts on a conference call.

In Europe, German and French manufacturing, which at this time last year spearheaded the euro zone's recovery, suffered a sharp decline in March that even the most pessimistic economists failed to predict.

Investors immediately hedged exposure to trades betting on a rebound in global growth. Brent crude oil pared losses to 0.3 percent after the U.S. jobs data before falling again, last trading down 1.4 percent to $122.45 a barrel.

The HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell to 48.1 from February's four-month high of 49.6, and firmly below 50, the threshold that divides contraction and growth.

The survey added weight to a string of downbeat anecdotes from major corporations on the world's No. 2 economy. BHP Billiton, the world's biggest miner, said on Tuesday it was seeing signs of "flattening" iron ore demand from China.

Broad-based weakness in the five key components that generate the Chinese PMI index surprised analysts, particularly those who had anticipated a clear-cut rebound in factory activity in March after the Lunar New Year holiday disrupted output in the first two months of 2012 and distorted the data.

"This data suggests there's something more profound at work, that it's not just a Lunar New Year problem and that it's not just affecting exports, but domestic demand," said Tim Condon, chief economist and head of Asian research at ING in Singapore.

EUROPE FLAGS AGAIN

Markit's Eurozone Composite PMI declined unexpectedly to 48.7 in March from 49.3 in February, a full point below economists' consensus forecast of a 49.7 reading, capping the first quarter of the year in disappointing style.

Most worryingly, the surveys suggested business activity in economic heavyweights France and Germany is starting to flag, with job losses mounting across the euro bloc at the fastest pace since March 2010.

"We're more pessimistic than the consensus on the euro zone over the next year or two, both in terms of the outlook for the economy and also the currency union itself. So in that sense, these numbers give some support to that view," said Capital Economics' Loynes.

The European Central Bank has pumped more than 1 trillion euros ($1.32 trillion)of cheap three-year loans into the banking system over the last four months, lowering bond yields in the process. But the PMIs showed the impact of this has yet to be felt in the wider economy.

"While we still see a good chance of the recession in the euro zone coming to an end in spring, it seems unreasonable to expect more than an anemic upward movement in the further course of this year," Christoph Weil, economist at Commerzbank in Frankfurt, said in a research note.

PMI compiler Markit said the surveys were consistent with a decline of 0.1 percent in euro zone gross domestic product during the first quarter, following the 0.3 percent decline seen in the last three months of 2011.

With France and Germany now struggling, Markit said it was hard to see what could drive the currency union forward in the months ahead, especially since many of its smaller countries are already mired in recession.

"The austerity measures implemented there are going to keep some major economies such as Italy and Spain in recession, which is going to damage the region as a whole," said Chris Williamson, chief economist at Markit.

By contrast, Britain should at least avoid a recession, but hopes that the UK economy will pick up momentum were dealt a blow on Thursday with news that retail sales in February suffered their biggest monthly fall in nine months. ($1 = 0.7579 Euro) (Editing by Jeremy Gaunt, James Dalgleish, Gary Crosse)

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