Thursday, July 22, 2010

Euro zone starts 3Q on strong footing

LONDON: The euro zone's private sector surged in July, data showed on Thursday, July 22 confounding forecasts and contrasting with renewed concern about the U.S. economy after Federal Reserve Chairman Ben Bernanke said the economic outlook was "unusually uncertain".

European purchasing managers' indexes showed private sector business activity accelerated in July, surprising economists who had expected a slowdown and indicating third-quarter euro zone growth of around 0.6-0.7 percent, analysts said. That would be double forecasts in a Reuters poll last week for 0.3 percent growth.

The data came a day after Bernanke warned the U.S. economic outlook was "unusually uncertain" and indicated further monetary easing might be necessary to support the world's biggest economy. It also came on the heels of news last week of a slight moderation in China's runaway economic growth in the second quarter.

Ken Wattret at BNP Paribas, however, warned that while the euro zone data was bullish, mainly due to Germany and France, final purchasing managers' surveys at the end of the month, which will include euro zone peripheral economies, would not be as upbeat.

"My big issue is whether there will be a slowdown in the second half of the year and on the basis of what we are hearing from the U.S. economy and signs of a cooling off in China, I think it is very likely we will see a slowdown," Wattret said.

A Reuters poll of more than 600 economists published last week suggested the world economy will cool a bit in the next few months as China and the United States gear down.

While many major central banks have started looking at exit strategies from their loose monetary policies -- Canada, Australia and India have already raised interest rates -- Bernanke said on Wednesday the Fed stood ready to ease monetary policy further if the recovery falters.

The U.S. economy resumed growth about a year ago, but stubbornly high unemployment, a fresh drop in housing activity and a slowdown in manufacturing have raised fears of a "double-dip" recession there. A Reuters poll last week said the chance of a dip back into recession was 15 percent.

U.S. existing home sales and jobless claims data, all due on Thursday, will give further clues about the health of the U.S. economy.

CHINA SLOWDOWN China's growth moderated to 10.3 percent in the second quarter from 11.9 percent in the first quarter and a Reuters poll of economists this month forecast 10 percent growth overall this year.

The slowdown in China has fuelled market expectations that Beijing might also hold off tightening policy or even announce new stimulus measures.

And the Bank of England, which has slashed rates to record lows and injected billions of pounds into the money supply, discussed further easing as well as tightening at its last policy-setting meeting, according to minutes released on Wednesday.

"The traditional balancing act has become much more acute," the Bank of England's chief economist, Spencer Dale, was quoted as saying in the Independent newspaper on Thursday.

"It has the flavour of the challenges we faced in 2008 -- substantial downside risks to growth but also upside risks to inflation staying above target and feeding through into wages and price setting."


Markit's Eurozone Flash Services PMI, made up of surveys of 2,000 businesses ranging from hotels to banks, jumped to 56.0 in July from 55.5 in June, easily outpacing expectations for 55.0 and beating out even the most optimistic forecast polled by Reuters for 55.5.

The euro zone's manufacturing sector, which drove a large part of the economy's return to growth in the third quarter of last year, also accelerated.

"Overall, some encouragement that the recovery in Germany and the core euro zone has momentum. But concerns about the (euro zone) periphery are set to linger, if not deepen," said Ben May at Capital Economics.

While the euro zone economy has emerged from its worst post-war recession it grew only 0.2 percent between January and March, after a paltry 0.1 percent expansion in the final three months of 2009.

It is expected to have grown 0.6 percent in the second quarter but growth is seen slowing to 0.3 percent later in the year. - Reuters

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