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updated: 8/21/2014 7:48 AM

Manufacturing slows from Europe to China on trade risks

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Bloomberg News

Manufacturing activity slowed in the euro area and China as rising political tensions threaten to weaken trade and damp the outlook for the global economy.

A preliminary Purchasing Managers Index for the manufacturing industry in the euro area fell to 50.8 from 51.8 in July, London-based Markit Economics said today. That's the lowest level in 13 months and less than the 51.3 median estimate in a Bloomberg News survey. In China, a similar gauge from HSBC Holdings Plc and Markit dropped to 50.3 from 51.7, trailing all forecasts in a separate survey. Readings above 50 indicate expansion.

The euro area's recovery from its longest-ever recession stalled in the second quarter and is threatened further by low inflation and a sanctions standoff with Russia. In China, a credit slowdown adds to risks that the world's second-largest economy will miss its growth target this year.

Geopolitical tensions "will become increasingly critical in the coming months," said Martin van Vliet, senior economist at ING Groep NV in Amsterdam. "The big drop in China is still consistent with a slowdown in growth. The recovery in the euro area is too slow to create a turnaround in the global market."

Unexpected Stagnation

In the euro area, a composite indicator of activity in the manufacturing and services sectors fell to 52.8 from 53.8 in July.

While the gauge has signaled growth for more than a year, the region's revival unexpectedly stagnated in the three months through June as Germany, France and Italy, its three largest economies, failed to grow. With inflation below 1 percent since October, unemployment near record highs and global risks increasing, the European Central Bank unveiled unprecedented policy measures in June and committed to boost stimulus if needed.

"The geopolitical uncertainties, and in particular the crisis in Eastern Ukraine, threaten to undermine the export-led recovery at least temporarily," said Christian Schulz, an economist at Berenberg Bank in London. "The aftermath of the crisis, in particular high unemployment rates and continued public and private-sector deleveraging, limit the potential growth contributions from public and private consumption."

Chinese Stimulus

Last month, the European Union curbed Russia's access to bank financing and advanced technology in response to the country's support of separatists in Eastern Ukraine. Russia retaliated with sanctions on EU food products. Russian President Vladimir Putin and Ukrainian President Petro Poroshenko may hold bilateral talks next week, according to unidentified people cited by the Kommersant newspaper.

In China, July's weaker-than-expected credit, industrial production and fixed-asset investment data spurred speculation the government will add to measures such as expedited fiscal spending and targeted monetary easing to aid the economy.

Recoveries in the U.S. and Europe helped accelerate Chinese export growth to 14.5 percent last month from a year earlier, supporting Premier Li Keqiang's 7.5 percent expansion target for this year.

China's gross domestic product will increase 7.4 percent in 2014, according to a Bloomberg News survey.

"Today's data suggest that the economic recovery is still continuing, but its momentum has slowed again," Qu Hongbin, HSBC's chief China economist in Hong Kong, said in the PMI statement. "More policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity."

In the U.S., the Federal Reserve is on track to end quantitative easing in October, and some officials argue that they might have to raise borrowing costs sooner than they had anticipated, according to the minutes of the central bank's July meeting published yesterday.

An index of manufacturing activity in the U.S. will fall to 55.7 from 55.8 in July, according to economists in a Bloomberg News survey. The report will be published today at 9:45 a.m. Washington time.

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