* China's manufacturing PMI falls to 8-month low
* French business activity returns to growth
* Adds to signs that broad euro zone recovery taking shape
* Steeper price cuts by bloc's firms highlight deflation
By Jonathan Cable
LONDON, March 24 China's huge manufacturing
engine stuttered in the early part of 2014 while a return to
growth in French business activity this month suggested a solid,
broad-based recovery was taking shape in the euro zone, surveys
Weaker-than-expected readings from China pointed to a
contraction in the first three months of the year and will raise
market expectations of government stimulus to arrest a loss of
momentum in the world's second-largest economy.
"It tells you something about the extent to which market
concerns about a slowdown in China are justified," said Peter
Dixon at Commerzbank. "In the euro zone, the economy is bowling
along at a reasonable pace."
A solid expansion in both the euro zone's manufacturing and
services industries in March, and growth in its second-biggest
economy France, meant the bloc's recovery pace barely slowed
from February's 2-1/2-year high.
But the threat of deflation in the region was highlighted by
surveyed firms' increasing willingness to cut prices to attract
Data due later from the United States is expected to show
manufacturing growth in the world's top economy eased this month
from February's near four-year record high.
China's flash Markit/HSBC Purchasing Managers' Index (PMI)
fell to an eight-month low of 48.1 in March from February's
final reading of 48.5. The index has been below 50 since
January, indicating a contraction in the sector this year.
Output and new orders both weakened but new export orders
grew for the first time in four months, the survey showed,
suggesting the slowdown has been driven primarily by weak
"Usually, for the month of March, the PMI will rebound,
because after Chinese New Year, there should be some activity
coming back, but this PMI is disappointing," said Wei Yao, China
economist at Societe Generale in Hong Kong. "The government
probably will have to provide some supporting measures."
Earlier this month, sources told Reuters the central bank in
Beijing was prepared to loosen monetary policy in order to keep
the economy growing at 7.5 percent. Last year, China's economy
grew 7.7 percent, the same pace as in 2012.
Premier Li Keqiang said last week investment and
construction plans would be accelerated to ensure domestic
demand expands at a stable rate.
Further signs of a slowdown in China pushed European shares
lower on Monday, although robust data from France and Germany
limited their decline.
Euro zone flash PMIs: link.reuters.com/cuh64s
France vs Germany composite PMIs: link.reuters.com/xym96v
Regional manufacturing PMIs: link.reuters.com/zuf89t
The euro zone's composite PMI, which is seen as a good
growth indicator, edged down to 53.2 from February's 32-month
high but Markit said it indicated a 0.5 percent economic
expansion this quarter, stronger than the 0.3 percent predicted
in a Reuters poll earlier this month.
Having lagged the recovery in much of the euro zone in
recent months, France's index surged through the 50-point
threshold to reach its highest level since August 2011, while
German composite figures showed growth slowed from February's
33-month high but remained strong.
"The best news in March saw manufacturing and services
output not only return to growth in France but expand at the
fastest rate for 31 months. Meanwhile, German expansion was
pretty robust," said Howard Archer at IHS Global Insight.
But worryingly for policymakers, firms have discounted
prices to drum up business for two years now - and they did so
in March at a steeper rate than last month.
Inflation across the currency union was just 0.7 percent in
February, well below the European Central Bank's 2 percent
target ceiling, and the latest PMI will do little to allay fears
of deflation in the region.
A significant number of economists have doubts about the
ECB's view that deflation is not a threat and that the recovery
will take hold without any more policy action.
Finland's central bank said on Monday inflation in the bloc
could stay low for longer than previously thought, potentially
making it harder to rebalance the economy.
The ECB has little room to manoeuvre, having already slashed
its main interest rate to near zero and given more than 1
trillion euros of cheap cash to banks for a three-year period,
and it held policy steady when it met earlier this month.
"The further signs of recovery will encourage the ECB in
refraining from further monetary easing, at least in the short
term," said Martin van Vliet at ING.
(Additional reporting by Adam Rose in Beijing and Leigh Thomas
in Paris; Editing by John Stonestreet)