GLOBAL ECONOMY-Business growth slows in China and Europe, but faster in U.S.

Thu Aug 21, 2014 11:38am EDT

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(Adds U.S. data, NEW YORK dateline)

* U.S. factory activity expansion speeds up

* Business activity growth slows in China and Europe

By Jonathan Cable, Xiaoyi Shao and Ryan Vlastelica

LONDON/BEIJING/NEW YORK, Aug 21 (Reuters) - Business growth in China and across Europe slowed this month, surveys showed on Thursday, but U.S. activity picked up speed, leaving a mixed picture of global economic growth.

"If you take all these things together we are clearly looking at a global economy that doesn't have a huge amount of momentum behind it," said economist Peter Dixon at Commerzbank.

China's manufacturing sector expanded at its slowest pace in three months in August and a Reuters poll showed Japan's economic recovery is likely to be modest despite a small acceleration in the factory sector.

Markit/HSBC's preliminary China manufacturing purchasing managers index fell to 50.3 in August from July's 18-month high of 51.7, badly missing a Reuters forecast of 51.5 but just above the 50 threshold that differentiates expansion from contraction.

"The sharp drop in the PMI is perhaps not surprising given last month's disappointing activity and lending data. That said, we are not expecting a rapid deterioration in economic momentum," Julian Evans-Pritchard, China economist at Capital Economics, wrote in a note.

"Meanwhile, we expect the government to continue to fine tune policy as necessary to prevent growth from slipping too much over the coming quarters."

A burst of policy stimulus since April lifted China's annual economic growth to 7.5 percent in the second quarter, from 7.4 percent in the first quarter, the weakest pace in 18 months.

In Japan, the PMI for factory activity showed acceleration in August as export and domestic demand increased, another sign economic growth is steadying after shrinking in the second quarter due to a sales tax increase.

But the Reuters Tankan survey indicated the recovery is likely to be modest, which could keep pressure on the central bank to act to sustain growth in the world's third-largest economy.

EUROPEAN ACTIVITY SLUGGISH

Euro zone private business activity expanded more slowly than expected in August, even before the full effects of sanctions imposed on and by Russia over Ukraine are felt.

Markit's Composite Purchasing Managers' Index for the euro zone will provide gloomy reading for the European Central Bank as it showed the big two economies of Germany and France struggling.

The Composite Flash PMI fell to 52.8 from July's 53.8, far short of expectations in a Reuters poll for a modest dip to 53.4.

However, Markit said the data points to third-quarter economic growth of 0.3 percent, matching predictions from a Reuters poll last week.

But there are challenges facing the European economy after Europe and the United States imposed economic sanctions on Moscow over the Kremlin's support for rebels in eastern Ukraine, prompting a tit-for-tat response from Russian President Vladimir Putin.

"It is clearly premature to start fretting about a new downturn," said Martin van Vliet at ING. "That said, with geopolitical tensions increasingly posing a threat to the subdued and fragile upturn, it is clearly premature to assume that the ECB's easing work is fully done."

Companies in Europe are beginning to show signs of strain.

Germany's Adidas, the world's No. 2 sportswear firm, cut its profit target due to the rouble's fall and increasing risks to Russian consumer sentiment. Brewer Heineken said its sales volume in Russia fell by a "low-double digit" percentage.

The composite PMI in Germany fell to 54.9 from 55.7. Even so, Germany's private sector grew for a 16th straight month in August, suggesting Europe's largest economy could expand robustly in the third quarter after it suffered a surprise contraction in the second.

For France, the euro zone's second-largest economy, the Composite PMI rose from 49.4 to the break-even mark at 50, meaning it is neither expanding nor contracting.

In Britain, consumers have been the main driver of the country's economic recovery that began last year, but retail sales rose in July at a weaker pace than expected.

No action is expected from the ECB in the coming months as it waits to see what effect another round of temporary access to cheap cash for banks has on inflation and economic growth.

Consumer prices in the euro zone rose just 0.4 percent on the year in July, the smallest annual rise since October 2009 at the height of the financial crisis, and well within the ECB's "danger zone" below 1.0 percent.

U.S. FACTORY EXPANSION FASTER

The U.S. manufacturing sector expanded in August, with the rate of growth exceeding expectations and moving at the fastest pace in more than four years, equivalent data from private data vendor Markit showed on Thursday.

Markit said its preliminary or "flash" U.S. Manufacturing Purchasing Managers Index rose to 58 in August, its highest since April 2010, from 55.8 in July. Economists polled by Reuters expected a reading of 55.7.

"August's survey delivers further evidence that robust manufacturing growth momentum has been sustained through the third quarter, with overall business conditions improving at the fastest pace for over four years," said Tim Moore, senior economist at Markit.

Markit's gauge of employment in the U.S. manufacturing sector rose to 54.6 from 51.2, and was at its highest since a matching 54.6 in March 2013.

In a different survey, factory activity in the U.S. mid-Atlantic region expanded in August to its highest level since March 2011, according to the Philadelphia Federal Reserve Bank.

Its business activity index rose to 28.0 from 23.9 the previous month. That topped economists' expectations for a reading of 19.2, according to a Reuters poll. Any reading above zero indicates expansion in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

"Overall, while the headline was strong, the sub-indexes were softer, and therefore the market's response has been somewhat muted," said Ian Lyngen, senior government bond analyst at CRT Capital in Stamford, Connecticut.

(Editing by Jeremy Gaunt, Clive McKeef and Dan Grebler)

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