China factories offset global slowdown worries

(Reuters) - U.S. and European factory activity cooled in September, but a strong revival of Chinese manufacturing after a mid-year lull soothed fears of a new downturn in the global economy.

Despite slowing down, the purchasing managers’ indexes (PMIs) for the United States and Europe remained well above the 50 mark that divides growth from contraction.

Nervousness still reverberating from the European sovereign debt crisis and the fading boost from the rebuilding of inventories are curbing manufacturing activity, but economists do not expect an outright contraction in output.

“The risk of a double dip has gone down sharply because of the Chinese numbers bouncing back ... the U.S. numbers are still healthy,” said Jim O’Sullivan, chief economist at MF Global in New York.

While global stocks were cheered by the robust Chinese factory data, U.S. shares cut gains on the domestic manufacturing report.

The Institute for Supply Management’s index of U.S. factory activity slipped to 54.4 last month from 56.3 in August.

The Markit Euro Zone Manufacturing PMI suggested a two-speed recovery taking hold in Europe, with the headline index dropping to 53.7 in September from 55.1 in August.

“Growth is becoming more focused on the two largest economies of Germany and France as fiscal consolidation measures begin to bite in the periphery,” said Andrew Grantham at HSBC.

Factories in austerity-gripped Ireland and Spain went into reverse. Ireland on Thursday revealed an enormous bill for its banking sector bailout, and Spain lost its last top-notch AAA credit rating amid 20 percent unemployment.

Manufacturing growth in Britain, meanwhile, fell to its lowest since November as exports declined for the first time since July 2009, with the PMI there unexpectedly falling to 53.4 from 53.7.

Although the PMI surveys, which are considered a good leading indicator of broader economic activity, also showed declines in South Korea and Australia, the strength of the upturn in China cheered analysts and markets.

China’s official PMI rose to 53.8 in September from 51.7 in August, well above a median forecast of 52. A separate Chinese manufacturing PMI from HSBC also showed a strong upturn in September, rising to 52.9 from 51.9 in August.

“Fears of a substantial downturn have proved unfounded and this should put to rest a lot of the worries about the global outlook,” said Rob Henderson, head market economist at National Australia Bank in Sydney.

EMERGING BLESSINGS

Despite Thursday’s data showing Japanese manufacturing contracted for the first time in 15 months, Asian manufacturers have largely followed signs that U.S. activity had picked up a little in the third quarter.

India’s manufacturing sector expanded for the 18th straight month, but the pace slowed to a 10-month low.

Indian manufacturing had stayed strong earlier this year as Chinese activity had slowed.

“Capacity constraints may be partly responsible for this, in addition to the fading fiscal stimulus,” said Frederic Neumann, co-head of Asian Economics Research at HSBC.

In Australia, among the few developed economies to avoid a recession after the global financial crisis, a strong local currency and soft domestic demand led to the first contraction in manufacturing activity in 2010.

On Thursday, the U.S. government nudged its second-quarter growth estimate up to a 1.7 percent annualised pace from 1.6 percent after growth in consumer spending for April to June was revised up to the fastest pace in three years.

Though analysts say U.S. economic activity may have picked up in the September quarter, it remains far from robust and the Federal Reserve is expected to start a fresh round of monetary easing as soon as November.

“We can stop talking about a double dip, but we are going to grow much more slowly than most people’s memory of a recovery will cause them to expect,” said Jerry Webman, chief economist at OppenheimerFunds in New York.