China shows signs of recovery as eurozone struggles

A key indicator of manufacturing activity in China and Japan returned to growth in June after months of decline, but at the same time, the eurozone was struggling to maintain its recovery.

The HSBC/Markit purchasing managers’ index for China rose more than expected to 50.8 in June, the first time since December that the PMI was in growth territory.

A PMI for Japan was at 51.1 – showing growth for the first time in three months. Any reading above 50 indicates growth, while a reading below shows manufacturing may shrink.

Concern about China

The world has been concerned about the slowdown in China’s GDP growth rate, which could dip below 7.5 per cent this year as it transitions from an export-driven economy to one more powered by domestic consumption.

• European Central Bank adopts negative interest rates
• Chinese exports fall 6.6% in March
• China stimulus plan invests in rail, construction

China's government has unveiled a series of modest policy measures in recent months to give a lift to economic growth, including more lending and hastening construction of railways and public housing projects. These measures appear to have had an impact, analysts said.

But in Europe, France’s private sector continued to shrink with the French PMI slumping to 48.00 from 49 in May.

France's GDP is forecast to expand by a slight 0.2 per cent in the second quarter and rising oil prices were hurting growth.

Its public debt was downgraded by ratings agencies last year and it suffers from high unemployment, escalating social costs and businesses with weak international competitiveness.

Germany's economy, Europe’s largest, is set to grow by 0.7 per cent in the second quarter, with its PMI at 54,

Uneven recovery of EU

Markit's Composite PMI, based on surveys of thousands of companies across the 18 countries that use the euro fell to 52.8 from May's 53.5.

There is concern about the uneven nature of the EU’s recovery, with Germany and the U.K. powering ahead while other nations struggle.

"The recovery has not gained as much traction as people had hoped. We've been highlighting the divergence between France and Germany for some time - it's not just in the PMIs. It's definitely a concern," said Jessica Hinds at Capital Economics in an interview with Reuters.

The IMF warned the eurozone on its slow recovery last week, saying economic activity is still below pre-crisis levels.

The IMF says much higher growth is needed to bring down unemployment and debt and it believes inflation is "worryingly low, including in the core countries."

Inflation slowed to just 0.5 per cent in May, prompting the ECB to cut interest rates to record lows and offer new long-term loans to banks to help boost lending to eurozone companies.

The IMF recommended that the ECB should make large-scale purchases of assets such as bonds similar to the Fed stimulus program.

But Germany has rejected that suggestion, saying there is too much liquidity in the eurozone and it could lead to asset bubbles.