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Evidence world economy needs stimulus

Thursday, August 21 12:10:34

Business growth in China and across Europe slowed this month, surveys showed today, providing more evidence that the world economy is stuttering and may need more monetary stimulus to keep it going.

Euro zone private business activity expanded slower than expected in August, despite widespread price cutting. This is before the full effects of sanctions imposed on and by Russia over Ukraine are felt.

Meanwhile, China's manufacturing activity hit a three-month low in August and a Reuters poll showed Japan's economic recovery is likely to be modest despite a small acceleration in the factory sector.

Data due later from the United States is expected to show a similar slowdown.

"If you take all these things together we are clearly looking at a global economy that doesn't have a huge amount of momentum behind it," said Peter Dixon at Commerzbank.

Markit's Composite Purchasing Managers' Index (PMI) for the euro zone will provide gloomy reading for the European Central Bank (ECB) as it showed the big two economies of Germany and France struggling.

Based on surveys of thousands of companies across the region and a good indicator of overall growth, the Composite Flash PMI fell to 52.8 from July's 53.8, far short of expectations in a Reuters poll for a modest dip to 53.4.

However, readings above 50 do indicate expansion and Markit said the data point to third-quarter economic growth of 0.3 percent, matching predictions from a Reuters poll last week.

But there are challenges facing the economy now that it didn't have to worry about a few months ago.

Europe and others in the West imposed economic sanctions on Moscow over the Kremlin's support for rebels in eastern Ukraine, prompting a tit-for-tat response from Russian President Vladimir Putin.

"It is clearly premature to start fretting about a new downturn," said Martin van Vliet at ING. "That said, with geopolitical tensions increasingly posing a threat to the subdued and fragile upturn it is clearly premature to assume that the ECB's easing work is fully done."

Companies in Europe are beginning to show signs of strain.

Germany's Adidas, the world's number-two sportswear firm, cut its profit target due to the rouble's fall and increasing risks to Russian consumer sentiment. Brewer Heineken said its sales volume in Russia fell by a "low-double digit" percentage.

The composite PMI in Germany - Russia's biggest trade partner in the European Union which has already seen exports to the country plunge in the first half of the year - fell to 54.9 from 55.7. For France, the euro zone's second largest economy, the Composite PMI rose from 49.4 to the break-even mark at 50, meaning it is neither expanding nor contracting.

In Britain, which does not use the euro, consumers have been the main driver of the country's economic recovery which began last year. But retail sales rose in July at a weaker pace than expected. (Reuters)

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