Euro zone, China PMIs ease as policy bites

By Jonathan Cable

LONDON (Reuters) - Manufacturers in Europe and China tapped the brakes this month and price pressures eased as tighter policy measures to control inflation began to bite, purchasing managers' indexes showed on Monday.

Preliminary purchasing managers' surveys pointed to marginally slower economic growth in the euro zone and China in the second quarter while growth in the common currency bloc's dominant service sector also slowed more sharply than expected.

But policymakers will take some cheer from the fact that prices did not rise so steeply this month.

"One good piece of news in the report was some waning of price pressures, with both the composite output and input price indexes declining in May, though they remain at relatively high levels," said Nick Kounis at ABN AMRO.

China's central bank has raised interest rates over recent months and in April the European Central Bank became the first of the big four to hike rates, upping its benchmark by 25 basis points from its record low of 1.0 percent in the battle to contain inflation stoked by food and fuel prices.

The euro zone's composite flash PMI, a broader measure of the private sector which combines the services and manufacturing data, fell to 55.4 from 57.8, below forecasts for 57.4 although still well above the 50 divide between growth and contraction.

The composite index is often used as a guide to growth and Markit said it was consistent with a quarterly gross domestic product expansion in the euro zone of 0.7 percent for the second quarter, down from the first quarter's 0.8 percent growth.

Economists polled by Reuters earlier this month predicted growth of 0.4 percent this quarter.

Earlier data showed China's factories expanded at their slowest pace in 10 months with its flash PMI easing to 51.1 from 51.8 in April and many analysts expect China's economic growth to slow modestly from a turbo-charged pace of 9.7 percent.

Talk that China's economy may face a sharper slowdown, or a "hard landing," picked up this month after official data showed industrial activity and bank loans missing market forecasts.

"With the expansion in the emerging markets shifting into lower gear, the export-led boom in European manufacturing is somewhat softening," said Peter Vanden Houte at ING.

The new orders index for euro zone manufacturers fell to 53.8, its lowest level since September, from April's 57.4, despite the competitive advantage of a recent weakening in the euro.

DIVIDED

Worryingly for ECB policymakers, a big divide remains between economic performance in France and Germany, and struggling economies on the periphery of the 17-nation bloc.

"Growth slowed in France and Germany but it is still far outpacing what we have seen in the rest of the region where growth has slowed to near stagnation. That is a really disappointing signal," said Chris Williamson at Markit.

The euro zone's services PMI fell to 55.4 in May from April's 56.7, its lowest level since December, and missing expectations for 56.5.

But this is the 21st month that the index, which measures the activities of companies ranging from banks to hotels, has been above the 50 mark.

The flash manufacturing PMI fell to 54.8 from 58.0 in April, much lower than consensus expectations in a Reuters poll for 57.4, while the output index dropped to 55.3 from 60.2.

Earlier data from Germany, Europe's largest economy, showed the pace of growth in its manufacturing sector slowed considerably from April's near record high while its service sector PMI also dropped.

Growth in the French service sector slowed only marginally from last month's more than 10-year high but its manufacturing sector grew at its slowest pace in four months.

Optimism among euro zone service sector firms was at its lowest since July 2009, with the business expectations index falling to 63.9 from last month's 66.1.

Despite this, firms continued to take on more workers, albeit at a slower pace than last month, with the composite employment index dipping to 52.7 from last month's 53.1.

The official euro zone unemployment rate held steady at 9.9 percent in March.

(Additional reporting by Kevin Yao and Koh Gui Qing in Beijing; editing by Susan Fenton/Ruth Pitchford)