China and the Euro Zone: A Threat to U.S. Economic Recovery?

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Factory output in China, the world’s second largest economy, weakened to a nine-month low in June — which, together with the continued recession in the euro zone, could threaten the global recovery led by the United States. The data showing China’s economy was wobbling came just one day after the Federal Reserve indicated that the U.S. economy was firmly on a recovery path, so firmly, in fact, that the central bank has considered ending its financial stimulus.

Faltering demand drove the flash estimate of the HSBC China Purchasing Manager’s Index, a private survey of Chinese manufacturers, down to 48.3 in June from 49.2 the previously month, indicating further contraction in that sector. The reading also put more pressure of the People’s Bank of China to loosen monetary policy. In fact, China’s economy grew at its slowest pace for 13 years in 2012, and economic data this year has been worse than expected, warnings that the country could miss its 7.5 percent growth target.

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Still, “a slowdown in the Chinese economy doesn’t help the outlook for the U.S. particularly, but American growth isn’t entirely dependent on what happens in China,” Investec chief economist Philip Shaw told Reuters.

Meanwhile, Markit’s flash estimate of the euro zone PMI, data that is seen as a reliable economic growth indicator for the bloc, stayed below 50 — the dividing line between growth and contraction. However, the index did jump from May’s reading of 47.7 to 48.9 in June, suggesting that economic stagnation had eased across the 17-nation bloc. It was the highest PMI level recovered since March 2012, but still, the index has been below the 50 mark in all but one of the last 22 months. Markit’s latest PMI data also suggested the economy would contract 0.2 percent in the current quarter.

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In contrast, U.S. economic data has been generally positive; Thursday’s flash reading of the U.S. Purchasing Managers’ Index rose slightly from 51.9 to 52.2. However, even though the index remained above the level that indicates monthly growth, that rate of growth was moderate at the very best.

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Pressure has been growing for the European Central Bank to increase its efforts to end the the bloc’s longest-ever recession, but most economists do not believe the central bank will adjust its policy in the next few months. China’s central bank faces a similar situation, except for one main difference; the euro zone has faced six quarters of economic contraction, while, comparatively, China is just beginning to experience weakening economic conditions. “The chance of economic growth slipping below 7 percent is quite low, because existing measures are still effective in helping stabilize the economy,” Guotai Junan Securities analyst Wang Jin told Reuters.

Both the Chinese and euro zone PMIs saw another fall in new manufacturing orders, a sign that it could be quite some time before both economies pick up. “It’s suggesting that things are moving in the right direction but it’s not going to happen fast. It’s still a weak picture,” Markit’s chief economist Chris Williamson told the publication.

Follow Meghan on Twitter @MFoley_WSCS

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