China on mend, U.S. factory data encouraging

China's vast manufacturing sector grew in December and U.S. factories had their best month since April, surveys showed on Friday, adding to hopes that the world's top two economies were on the mend.

Solid growth from the United States and China will be crucial to reviving the world economy in 2013, particularly with the euro zone likely sliding deeper into recession.

While an index of euro zone manufacturing and service sector activity rose to a nine-month high, it still showed contraction in both areas. That's consistent with the 17-country euro zone shrinking by 0.5 percent in the fourth quarter.

The HSBC flash PMI showed China's manufacturing sector expanded in December at its fastest pace in 14 months as new orders and employment rose, adding to evidence of a pickup in the economy that helped to boost market sentiment.

The data was "a further sign that the Chinese economy is already starting to recover," said Nikolaus Keis at UniCredit.

In the United States, financial information firm Markit said its manufacturing index showed the sector grew at its quickest pace in eight months as demand from domestic and foreign customers increased.

Stronger manufacturing output should help bolster a U.S. economy that has seen slow but steady improvement in employment and consumer spending and signs of life in the housing market.

"People are always hoping for good news from the United States and China, as both economies are the main drivers of global economic activity," said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

However, a more closely watched gauge of U.S. factory activity published earlier this month by the Institute of Supply Management showed contraction in the sector last month, making it premature to conclude manufacturing was improving and would be contribute much to overall growth.

Porcelli also said uncertainty about whether U.S. lawmakers could strike a deal to avoid $600 billion in automatic tax increases and spending cuts before year end was tempering optimism and suppressing corporate hiring and investment.

EURO ZONE IMPROVES SLIGHTLY

Earlier on Friday, composite PMI data from Germany, Europe's largest economy, showed its private sector bounced back to growth for the first time in eight months in December.

In France, the downturn eased but the PMI held below 50 for the 10th straight month, indicating contraction.

The regional euro zone PMI has been below the 50 mark for all but one of the past 16 months but the euro zone agreed a deal on Thursday to provide nearly 50 billion euros in long-delayed aid to Athens.

The PMI for the euro zone's dominant service sector rose to 47.8 this month from 46.7, beating forecasts for a rise to 47.0.

The continued downturn came despite firms cutting prices despite their costs rising - cutting into their margins - for the ninth month.

Manufacturers, who led the bloc out of the last recession, fared little better. The factory PMI crept up to 46.3 from 46.2, missing forecasts for a steeper rise to 46.6.

But in a further sign the global economy might be improving, the rate of decline in new export orders from factories eased, with the sub-index at a nine-month high of 46.8.

"There are some rays of hope here. It is moving in the right direction so there are signs that the business cycle has reached a low point globally and is picking up," Chris Williamson, chief economist at Markit said.

The euro zone economy contracted 0.2 percent in the second quarter and 0.1 percent in the third, meeting the technical definition of a recession and a Reuters poll last week predicted a 0.3 percent contraction in the current period.

That would be slightly better than the PMIs published on Friday suggest.

(Editing by Jeremy Gaunt and Clive McKeef)