Euro zone factory slump deepens but Asia perks up

Euro zone factories sank deeper into recession in December as new orders tumbled, business surveys showed on Wednesday, a sharp contrast to continuing signs of revival in China.

U.S. manufacturing reports, to be released later in the day, are expected to show activity in the world's largest economy to have expanded modestly.

Purchasing managers' surveys in the 17-nation euro zone showed economic decline spread further into the core members, suggesting the overall economy may have slipped deeper into recession at the end of 2012.

Markit's Euro zone Manufacturing Purchasing Managers' Index (PMI) edged down to 46.1 in December from November's 46.2, below a flash reading of 46.3. It has been below the 50 mark that divides growth from contraction since August 2011.

"It's pretty grim really," said Jonathan Loynes at Capital Economics. "These surveys are pointing to a pretty deep recession. If the German industrial sector is contracting quite sharply it is pretty hard to see where growth across the euro zone as a whole is going to come from."

Germany, Europe's largest economy, saw its crucial manufacturing sector shrink for the 10th straight month and at a faster pace, while French data showed a decline in all but one of the past 17 months. The slump in Spain deepened, while Italy's index, although improved, remained below 50 for the 17th month.

Ireland was the only member of the currency union to show manufacturing growth in December.

Separate data on Wednesday showed French car sales dropped 15 percent in December, the worst annual performance in 15 years, while Spanish new car registrations were down 23 percent.

But British factory activity jumped unexpectedly to grow at its fastest pace since September 2011, raising the chance that its economy eked out some growth at the end of 2012.

"The sector seems to be showing some signs of improvement - probably as the euro zone (debt) crisis is easing a little bit and Chinese growth is bottoming out," said Rob Wood at Berenberg Bank.

In Asia as a whole manufacturing activity expanded, driven by revival in China's economy, but export demand was uneven, pointing to further sluggish growth for the region.

Factory activity in India expanded at its strongest pace in six months in December, boosted by output and a spike in new orders and similar reports showed an increase in South Korea and Taiwan for the first time since May.

CHINA REVIVAL?

For Asia, much hinges on the pace and quality of the recovery in China as a new generation of leaders prepares to take charge.

The official China manufacturing PMI on Tuesday held steady in December at 50.6, matching November's seven-month high. A similar survey by HSBC released a day earlier, which focuses more on smaller and mid-sized firms, suggested activity was at its strongest since May 2011.

Together the surveys support a growing consensus that economic activity in China picked up during October to December -- after GDP growth had slowed for seven consecutive quarters to 7.4 percent in the third quarter -- partially offsetting persistent weakness in Europe and Japan.

In India, Asia's third-largest economy, the HSBC Markit Manufacturing PMI, which gauges the business activity of the country's factories but not its utilities, jumped to 54.7 in December from 53.7 in November, its biggest monthly rise since January 2012.

Activity in Southeast Asia's largest economy, Indonesia, expanded but at a slower rate, as growth of new export orders eased from a month earlier.

A lot may depend on elsewhere, however.

"Asia is gradually improving, but the region, including China, remains largely exposed to exports and without signs of improvement in the U.S. and Europe it will be hard for activity to take off," said Frederic Neumann, co-head of Asian economics at HSBC.

(Additional reporting by David Milliken in LONDON, Se Young Lee in SEOUL; Lucy Hornby in BEIJING; Editing by Jeremy Gaunt)