China’s factories storm ahead, output growth returns to euro zone

China’s factory sector grew in February at the fastest pace in more than a decade, a standout in Asia where manufacturing growth stalled elsewhere, while in the euro zone output expanded for the first time since May, surveys showed on Wednesday.

Slowing global demand coupled with high inflation and interest rates have hit manufacturers, but stronger signs that Chinese factories are rebounding after the removal of strict COVID-19 curbs could, as supply chains also recover, temper an expected downturn in the global economy.

China’s official manufacturing purchasing managers’ index (PMI) climbed to 52.6 last month against 50.1 in January while a private sector survey also showed activity rising for the first time in seven months.

“China’s PMIs beat market expectations across the board, propelled by the reopening after dropping COVID restrictions and the resumption of activity after the lunar new year holiday,” said Duncan Wrigley at Pantheon Macroeconomics.

“This is an encouraging set of data, but still is only one month, and challenges remain.”

Asian stocks bounced off a two-month low and headed for their best day in seven weeks on Wednesday but global prices for oil went higher, underlining how a strong Chinese recovery could fuel higher global inflation through increased energy demand.

Policymakers hope China’s re-opening from COVID curbs late last year, and resilience so far in U.S. and European economies, will underpin global growth this year. EURO ZONE PICTURE MIXED
In the euro zone, S&P Global’s headline factory PMI slipped to 48.5 from 48.8 but the output index – which feeds into a composite PMI due on Friday and seen as a good gauge of overall economic health – climbed to 50.1 from 48.9.

“The brighter production picture first and foremost reflects a broad-based improvement in supply chains, with deliveries of inputs into factories quickening on average to a degree not seen since 2009,” said Chris Williamson, chief business economist at S&P Global.

It was a similar situation in Germany, Europe’s largest economy, where the PMI was below 50 but the output gauge was in positive territory for the first time in nine months.

However in France, the currency union’s second biggest economy, activity declined, after stabilising the previous month, due in part to worsening export demand.

Inflation remains high in Europe and while central banks are reaching the end of their tightening cycles, prices rose faster than expected in France and Spain last month, pushing up European Central Bank rate expectations and challenging the view a rapid easing in price growth was underway. Inflation also edged up in some German regions.

Outside the European Union, British manufacturing activity contracted last month at the slowest pace since July and factories were more optimistic as the threat of a deep recession eases.

India and Australia saw economic growth slow in the quarter to December, and South Korea’s exports fell in February for a fifth straight month, highlighting the pain slowing global demand was inflicting on the region’s manufacturers.

The region’s weaker data underscores the challenge Asian policymakers face in reining in inflation with higher interest rates, without choking off their economic recoveries already facing pressure from the global economic slowdown.

China’s recovering economy, the world’s second largest, may not be enough to offset headwinds from weak chip demand and supply constraints for export-reliant economies such as Japan.

Japan’s final au Jibun Bank PMI fell to 47.7 in February from 48.9, dropping at the fastest pace in more than two years.

The weak outcome followed data showing a big drop in Japan’s factory output in January on slumping production of cars and semiconductor equipment, casting doubt on the BOJ’s view the economy was on course for a steady recovery.

Factory activity continued to shrink in Taiwan and Malaysia in February, and expanded at a slower pace in the Philippines, surveys showed.

India’s manufacturing activity expanded at the slowest pace in four months in February but remained relatively strong amid buoyant domestic demand, its PMI survey showed.

Separate data showed South Korea’s exports fell 7.5% in February from a year earlier, marking the fifth straight month of declines, partly due to a plunge in semiconductor exports.

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