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China, Japan manufacturing grows again, euro zone falters

By Jonathan Cable and Stanley White

TOKYO (Reuters) - Manufacturing in China and Japan returned to growth in June after months of decline but an unexpectedly sharp fall in French business activity dragged on the wider euro zone, surveys showed on Monday.

Beijing's targeted stimulus measures and Japan's improving labor market supported domestic demand in Asia's dominant economies but the gap between the common currency area's big two remains wide.

Germany and France went their separate ways again, with German business activity expanding robustly, albeit at a slower pace than last month, while France's private sector shrank at the fastest rate in four months.

"The recovery has not gained as much traction as people had hoped. We've been highlighting the divergence between France and Germany for some time - it's not just in the PMIs. It's definitely a concern," said Jessica Hinds at Capital Economics.

Markit's Composite Purchasing Managers' Index (PMI), based on surveys of thousands of companies across the 18 countries that use the euro and seen as a good indicator of growth, fell to 52.8 from May's 53.5. That was well below the consensus for 53.5 in a Reuters survey, matching the lowest forecast polled.

Readings above 50 indicate expansion. Markit said that with a robust recovery taking place in some euro zone periphery countries, the data still point to second-quarter economic growth of 0.4 percent.

Germany, Europe's largest economy, was again the driving force although its composite PMI eased to 54.2 from 55.6.

But the French index slumped to 48.0 from 49.3, its lowest reading since February.

"Déjà vu with the French numbers: worse than expected. Our own and the Banque de France's forecast of GDP expanding by 0.2 percent in Q2 looks optimistic now," said Holger Sandte at Nordea.

Also somewhat worryingly for the European Central Bank, a composite PMI sub-index measuring output prices held below the 50 mark for the 27th month, coming in at 49.7 as firms kept cutting prices despite soaring input costs.

Inflation slowed to just 0.5 percent in May, prompting the ECB to cut interest rates to record lows and offer new long-term loans to banks to help boost lending to euro zone companies.

"The further weakening of the PMI vindicates the ECB's recent decision to implement further monetary easing and will keep fears of a Japanification of Europe firmly alive," said Martin van Vliet at ING.

European stocks fell after the euro zone data in contrast with the upbeat numbers from China that earlier lifted Asian shares and the Australian dollar. MKTS/GLOB

STIMULATING DEBATE

The stakes are high for China, which may need more stimulus to offset a cooling housing market and avoid a hard landing. Japan's weak exports also take the gloss off the government's efforts to breathe new life into its economic reform agenda.

The HSBC/Markit Flash China Manufacturing PMI rose more than expected to 50.8 in June from May's final reading of 49.4, beating a Reuters poll forecast of 49.7 and creeping above the 50-point level.

It was the first time since December that the PMI was in growth territory, and the highest reading since November, when it was also 50.8.

"The country's factory sector gained momentum again and offering new signs that overall economic growth is at least stabilizing thanks to the government's efforts to shore up growth," said Nikolaus Keis at UniCredit.

China's government has unveiled a series of modest policy measures in recent months to give a lift to economic growth, which dipped to an 18-month low in the first quarter. These include targeted reserve requirement cuts for some banks to encourage more lending, quicker fiscal spending and hastening construction of railways and public housing projects.

The Markit/JMMA flash Japan Manufacturing PMI rose to a seasonally adjusted 51.1 in June from a final reading of 49.9 in May, showing the first growth in three months.

Japan's new orders index jumped to 52.0 from 49.6, indicating consumers are shrugging off an increase in the nationwide sales tax on April 1 as strong demand for workers puts upward pressure on wages.

External demand, however, remained weak for the two export powerhouses in a worrying sign that the United States and Europe may not be recovering as strongly as anticipated, meaning it could be difficult to rely on exports for growth.

A flash PMI due later on Monday from the United States is expected to show a slight upturn from May.

(Editing by Catherine Evans)

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