China's factories stumble and Germany's shrink

Tue Apr 23, 2013 12:04pm BST

An employee works inside a steel export factory in Taiyuan, Shanxi province, April 10, 2013. REUTERS/Jon Woo

An employee works inside a steel export factory in Taiyuan, Shanxi province, April 10, 2013.

Credit: Reuters/Jon Woo

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LONDON, April 23 - China and Germany, the world's two biggest exporters, showed new signs of weakness in major business surveys on Tuesday, increasing doubt about the strength of global demand and economic recovery.

A similar survey for U.S. manufacturing is due later in the day, expected to show growth among factories there slowed slightly this month.

The surveys come as a rethink by European leaders of their budget-cutting is gaining momentum - that, in the words of European Commission President Jose Manuel Barroso, austerity has reached its limits as a policy.

Business activity in Germany shrank for the first time in five months in April, while growth among the legion of Chinese factories slowed to a near-crawl as export orders dwindled.

Although purchasing managers' indexes (PMIs) published on Tuesday showed France may have passed the worst of its downturn, Germany's relapse means the wider euro zone still looks a long way from a return to economic growth.

The unexpected decline in German activity also adds a new dimension to next week's European Central Bank policy meeting.

"With Germany unable to offset the austerity and credit crunch drag on growth in the (weaker parts of the euro zone), and with excess capacity growing and business expectations falling, the only question is why the ECB has not cut rates already," said Lena Komileva, director of G+ Economics.

Markit's flash, or preliminary, services PMI for Germany, measuring growth in companies ranging from hotels to banks, fell to 49.2 in April from 50.9 the previous month.

That was worse than even the most pessimistic forecast from economists polled by Reuters and meant the index slipped below the 50 point dividing growth and contraction for the first time since November.

"Whereas we'd seen evidence that the economy had bounced back quite nicely in the first quarter ... there are suggestions that we could see a renewed downturn in the second quarter," said Chris Williamson, chief economist at compiler Markit.

Europe's politicians are becoming increasingly focussed on what will get the economy growing again, as the recession has undermined governments' efforts to get their finances in order.

Finance leaders of the G20 economies on Friday edged away from a long-running drive toward government austerity in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of worries over a sluggish global recovery.

EXPORTS WILT

Those fears were illustrated plainly by the PMIs.

The flash HSBC Purchasing Managers' Index for April fell to 50.5 in April from 51.6 in March but was still stronger than February's reading of 50.4.

The figures followed an unexpected contraction in export orders in March to Taiwan, one of the region's biggest providers of tech gadgets, signalling that Asia's trade-reliant economies may be losing further momentum.

"This release was more in line with the official PMI headlines in previous months, painting a picture of a painfully slow recovery in China's manufacturing sector," said Societe Generale economist Wei Yao in Hong Kong.

He said the official PMI, due on May 1, might provide a better guide for clues on how the second quarter is shaping up for China.

At least there might be better times ahead for its emerging market peer India, whose finance minister on Tuesday said the country's worst slowdown in a decade has bottomed out.

France too might have passed the nadir of its own economic troubles, the PMIs suggested, which helped the broader euro zone composite survey hold steady in April at 46.5.

But while on one hand showing the euro zone's recession is not worsening, the dire tone of the German PMIs means that might not be the case in the coming months.

"It is statistically neutral, but not in economics terms," said Komileva at G+ Economics of the euro zone PMIs.

(Editing by Jeremy Gaunt.)

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