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Euro zone, U.S. bounce back but China stalls

People take a escalator at the financial district of Pudong in Shanghai July 23, 2013. REUTERS/Carlos Barria
People take a escalator at the financial district of Pudong in Shanghai July 23, 2013. REUTERS/Carlos Barria

By Jonathan Cable and Steven C. Johnson

LONDON/NEW YORK (Reuters) - Private industry in the euro zone expanded for the first time in more than a year in July, which was also a good month for U.S. factories, but the massive manufacturing engine that powers China continued to lose steam, surveys showed on Wednesday.

The jump in Markit's "flash" Eurozone Composite PMI to 50.4, which marked the first expansion since January, 2012, should hearten European Central Bank policymakers who have promised to do whatever it takes to pull the 17-country euro zone out of the longest recession in the bloc's history.

But data showing China's factories lost momentum again this month dulled the good news in Europe and boded ill for companies exposed to the world's second largest economy. Chinese growth has slowed in nine of the past 10 quarters.

Knock-on effects are already being felt widely. Japanese export growth has slowed despite a weaker yen while Apple has lamented a drop in Chinese demand for its products.

"China's slowdown is starting to become more dangerous," said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.

China's overall PMI of business conditions fell to 47.7 from June's final reading of 48.2, its weakest since August 2012 and its third straight month below 50, which marks expansion. The employment sub-index slid to 47.3, the weakest since the depths of the global financial crisis in early 2009.

"This print could reignite fears of a Chinese hard landing," said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. "We expect economic growth to continue moderating towards 7 percent."

REBOUND IN U.S., GLIMMER OF HOPE IN EUROPE

Weaker demand from China and other emerging markets had contributed to a slowdown in U.S. manufacturing in recent months, though the sector rebounded modestly in July thanks to a pickup in demand at home

Markit's "flash" U.S. Manufacturing Purchasing Managers Index rose to 53.2, a four-month high, while output also was at its strongest since March. Increased workloads also encouraged firms to take on workers again after reducing payrolls in June, though the pace of hiring remained sluggish.

"For the U.S., this shows manufacturing will do a little better now after a bout of weakness earlier this year," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, though he added growth in the sector is "not exactly robust."

While the manufacturing rebound bodes well for U.S. growth in the third quarter, it is unlikely to persuade the Federal Reserve to hasten the end of its massive stimulus program.

"It is likely that policymakers will generally need to see growth strengthen further before sounding more confident about the ability of the economy to withstand any tapering of stimulus," said Markit chief economist Chris Williamson.

Chinese leaders, meanwhile, have stressed in recent weeks that reform is their priority. But they have also been at pains to assure investors that Beijing will not allow the economy to slip too far.

In Europe, the upbeat surveys came after official data showed French industrial morale at its highest in over a year in July while Italian retail sales rose on a monthly basis for the first time in 14 months.

"Better-than-expected PMI figures clearly support the notion that the euro zone economy as a whole is leaving recession behind," said Martin van Vliet at ING.

"(But) recent weakness in the Chinese manufacturing PMI is a reminder that a strong euro zone export recovery is unlikely."

Markit said the latest PMIs tentatively pointed to 0.1 percent gross domestic product (GDP) growth in the euro zone in the current quarter, in line with a Reuters poll taken earlier this month.

(Additional reporting by Langi Chiang; Editing by Chizu Nomiyama)

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