Europe's factories grow, U.S. manufacturing at two-year high

NEW YORK/LONDON Thu Aug 1, 2013 10:57am EDT

A labourer cuts scrap steel at a factory of Dongbei Special Steel Group Co., Ltd., in Dalian, Liaoning province July 24, 2013. REUTERS/China Daily

A labourer cuts scrap steel at a factory of Dongbei Special Steel Group Co., Ltd., in Dalian, Liaoning province July 24, 2013.

Credit: Reuters/China Daily

NEW YORK/LONDON (Reuters) - U.S. manufacturing grew in July at its fastest pace in two years while European factories snapped a two-year run of declining output, suggesting a prolonged euro zone recession may be near its end.

Output at British factories also surged last month, according to business surveys released on Thursday, while an index of China's massive manufacturing sector suggested the slowdown in the world's No. 2 economy may be stabilizing.

The data should hearten policymakers around the world, particularly those at the European Central Bank who have come under pressure to support an economy struggling to escape from the longest recession in the 17-country euro zone's history.

It probably does not, however, point to an imminent tightening of monetary policy. ECB President Mario Draghi on Thursday stressed that interest rates would remain at current lows or lower for an "extended time.

On Wednesday, the U.S. Federal Reserve said that the world's biggest economy was recovering but still needed support, dashing some expectations that it would start winding down its own stimulus program as soon as September.

"The general tilt of the Fed and other global central banks is still very accommodative, so I'm not concerned that this data will change that," said Thomas Simons, money market economist at Jefferies & Co in New York, who said the Fed will probably wait until the fourth quarter to slow its monthly bond purchases.

A sharp rise in new orders helped propel the Institute for Supply Management's index of national factory activity to a two-year high of 55.4 in July, beating economists' expectations of 52.0 and June's reading of 50.9.

A separate index from financial data firm Markit rose to 53.7, a four-month high, from 51.9 in June.

"It's obviously good news. Orders have bounced back. If this is happening in the context of a global improvement, that's a good thing," said Pierre Ellis, senior global economist at Decision Economics Inc in New York.

Markit's Eurozone manufacturing PMI showed marginal growth among factories for the first time in two years, with the index at 50.3, up from 48.8 in June. Output rose in Germany, Italy, the Netherlands, Ireland, France and Austria.

The company's flash composite PMI, based on surveys of thousands of companies across the region, jumped to an 18-month high of 50.4, from 48.7. Readings above 50 signify growth.

Markit chief economist Chris Williamson said it suggested the euro zone would grow by 0.1 percent in the current quarter, in line with a Reuters poll taken earlier this month.

In China, the official factory PMI was a bit stronger than expected last month, although growth remained modest. A rival report from HSBC painted a darker picture, showing factory activity at its lowest level in nearly a year.

PMI reports showed output and new orders falling in July in India, South Korea and Taiwan. In Indonesia, output and new orders were holding at similar levels to June.

Overall, the data allayed fears that the global economy's mid-year lull would deepen, although much still hinges on how many jobs the U.S. economy added in July. That data is due Friday, and economists polled by Reuters expect a 184,000 gain in payrolls compared to 195,000 in June.

"We're seeing different trends in different parts of the world, which are to a large extent offsetting each other," said Andrew Kenningham, senior global economist at Capital Economics in London.

The biggest surprise came form the UK, where Markit's UK manufacturing PMI jumped to 54.6, trumping even the most optimistic forecast in a Reuters poll of economists and triggering a rise in sterling.

Brian Hilliard, economist at Societe Generale, noted the fastest rises in new orders and output since February 2011.

"Just amazing. What's the need for (Mark) Carney to do anything?" he said, referring to the new Bank of England Governor. "It's shaping up for Q3 to be stronger than Q2."

(Additional reporting by Richard Leong in new York; Editing by Nick Zieminski)

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