NEW YORK/LONDON, (Reuters) – Business surveys yesterday suggested the world economy was on the mend, with U.S. and Chinese manufacturing activity at multi-month highs and better-than-expected growth in the euro zone.
The data should bolster the case for the Federal Reserve to start withdrawing support for the U.S. economy this year – possibly as soon as next month – and enhance the appeal for investors of developed economies in North America and Europe.
Markets are nervous about Fed plans to pare back the $85 billion of bonds it has been snapping up every month. However, a Fed retreat would amount to a vote of confidence in the world’s largest economy, an important anchor for global growth.
“Tapering would be a sign that the Fed believes the U.S. economy is gaining some traction. It signals that the recovery is more solid,” said Philip Shaw, chief economist at Investec.
“There are signs that momentum is building, albeit slowly, in the pace of the euro zone recovery, and in China too.”
The world economy has struggled for momentum, hobbled by debt problems ravaging Europe, while China grapples with waning foreign and domestic demand for its goods.
Financial firm Markit said U.S. manufacturing quickened in August at its fastest pace in five months. While overall output fell, a jump in new orders could be a good omen for the future, the firm said. Hiring also picked up.
Elsewhere, initial U.S. claims for unemployment insurance rose slightly but held near a six-year low, with the four-week moving average hitting its lowest since November 2007.
Economists forecast improving labor market conditions will help the U.S. economy gain momentum in the second half of 2013 and into 2014, making a withdrawal of Fed stimulus more likely.
In Europe, Markit’s Flash Composite Purchasing Managers’ Index showed business activity across the euro zone picked up this month at a faster pace than expected, with the index bouncing to 51.7 from last month’s 50.5. August’s reading was the highest since mid-2011. A reading above 50 shows expansion.
A flash composite PMI from Germany, the bloc’s largest economy, showed the growth rate was the fastest in seven months. In France, however, activity declined across the board.
German and French growth helped the 17-nation euro zone escape last quarter from its longest recession on record, growing by a modest 0.3 percent.
A Markit index for China rose to a four-month high of 50.1 from July’s final reading of 47.7, signalling modest growth in the country’s large manufacturing sector.
The Chinese government has announced a series of targeted measures to support the economy, including scrapping taxes for small firms, offering more help for exporters and boosting investment in urban infrastructure and railways.
“It confirms that the economy has stabilised in the short term and downside risks for (the second half of the year) have declined,” said Zhiwei Zhang, China economist at Nomura in Hong Kong said of the PMI.
Chinese factories also reduced headcount this month as growth is slowing in the world’s second largest economy.
But the overall picture from yesterday’s data was for a global economy dragging itself out of decline.
The outlook is more troubling in some other emerging economies. A recent spike in U.S. bond yields, driven by speculation that the Fed will soon slow its asset purchases, have hit many developing economies hard.
With U.S. growth picking up and Europe improving, global investors have started to pull money out of emerging markets, putting pressure on local currencies.
But economists say a sustainable rebound in Europe and the United States, coupled with stabilization in China, the world’s second largest economy, will support overall world growth.
“If the euro zone is picking up then that bodes well for the global economy,” said Chris Williamson, Markit’s chief economist.