EU business activity, China factory sector gain pace, but likely short-lived

(Reuters) – Euro zone businesses performed much better than forecasters expected this month and China’s vast factory sector grew a shade faster but there were worrying signs that the upturn could be short-lived.

The improvement in purchasing managers’ surveys, released on Thursday, will ease some worries about the outlook for the global economy, but news that companies in the euro zone cut prices at the steepest rate in almost five years will be of concern to the European Central Bank, which is striving to ward off the risk of deflation in the region.

In China, manufacturers booked more foreign and domestic orders but activity remained weak and analysts said the surveys did not point to a fourth-quarter turnaround for the slowing economy.

“They don’t change the picture for the euro zone which is bordering on recession. For China, although the headline number edged up, it really doesn’t point to a substantial improvement,” said Andrew Kenningham, senior global economist at Capital Economics.

“It’s a very unbalanced picture with strong and sustainable growth in the U.S. and the UK, feeble growth – if any – in the euro zone and Japan, and emerging economies have slowed to a new lower trend growth rate.”

Markit’s Eurozone Composite Flash Purchasing Managers’ Index (PMI), based on surveys of thousands of companies across the region and seen as a good indicator of growth, rose to 52.2, above all forecasts in a Reuters poll.

The poll had predicted a fall to 51.7 from September’s headline reading of 52.0 and October marks the 16th month the index has been above the 50 level that separates growth from contraction.

But optimism about the future among services firms was at its lowest level in over a year and new orders to factories fell for a second straight month.

“The general tone of the October purchasing managers’ survey suggests that the fourth quarter is going to be another almighty struggle,” said Howard Archer at IHS Global Insight.

Markit said the PMIs point to a 0.2 percent expansion of euro zone GDP in the current quarter, with risks to the downside. A Reuters poll last week also predicted 0.2 percent growth.

While Germany’s private sector saw faster growth this month, France’s business slump deepened, with business activity hitting an eight-month low.