Euro zone in reverse, China speeds up

The euro zone's economic downturn deepened this month, even before Cyprus' bailout troubles, but China's factories took a completely different path and moved up a gear, business surveys showed on Thursday.

Figures due later from the United States are expected to show a pick up by factories in the world's largest economy.

The euro zone survey results will add to the headache of policymakers battling to revive the currency bloc's fortunes and now to deal with the potential default of one of its members.

Most responses were received before Cyprus's parliament rejected a bailout deal that including an unprecedented levy on all bank deposits - leaving the country perilously close to financial collapse.

Data also showed leading economy Germany with signs of fatigue. French businesses turned in their worst performance in four years, probably plunging the euro zone's second-biggest economy into a recession.

"The sharp decline in the flash composite PMI in March pours cold water on hopes of an imminent end to the euro zone recession," said Martin van Vliet, economist at ING.

"If the situation surrounding Cyprus spirals out of control the onset of recovery might well be delayed."

Markit's Flash Euro zone Composite Purchasing Managers' Index (PMI), which makes up around 85 percent of the final reading and is seen as a reliable economic growth indicator for the bloc, fell to 46.5 in March from February's 47.9.

That was lower than all forecasts in a Reuters poll of 23 economists and far short of median expectations for a small rise to 48.2. The index has been below the 50 mark that separates growth from contraction for all but one of the past 19 months.

The positive news came from China, where factories increased their pace after a holiday dip, pointing towards solid but not spectacular first-quarter growth in the world's second-largest economy.

The HSBC China PMI for March revived to 51.7 in March from 50.4 in February, but remained below a two-year high of 52.3 reached at the beginning of the year.

The pullback in February had raised concerns in financial markets that China's recovery was losing steam. Indeed, official data earlier in March suggested the economy had started 2013 with only tepid growth after a burst in the fourth quarter.

But the latest data should allay some of those fears.

"Current readings ... seem to us to be consistent with GDP (gross domestic product) growth close to 8 percent year-on-year," wrote Dariusz Kowalczyk of Credit Agricole-CIB in Hong Kong.

WORSE TO COME?

Survey compiler Markit, which released the preliminary data and will issue final figures at the start of April, said the picture could be even worse by then.

"Events that hit business confidence can have a very rapid effect on the data and so there is good reason to believe that responses we collect this week will on average be more negative," said Chris Williamson, Markit's chief economist.

Having already contracted since the second quarter of last year, Markit said the latest PMI data suggested the euro zone economy would shrink 0.3 percent in the current quarter.

That is worse than the 0.1 percent contraction predicted in a Reuters poll taken last week that also forecast negligible growth next quarter - and only then because of German strength.

Germany's composite PMI fell in March, although it held above 50 for the fourth month, suggesting some strength in Europe's largest economy. But France's sank to a four-year low.

Some of the factory activity in the euro zone was generated by running down order books and incoming new business for services firms dropped at the fastest pace since October, suggesting next month's PMI will also be weak.

"The only bright spots are in the backwards looking indicators, like employment, holding up a bit better than expected. But the worry is these surveys were collected before the bad news on Cyprus really hit, so you have to wonder what impact that will have on business sentiment," Williamson said.

(Additional reporting by Lucy Hornby in Beijing. Editing by Jeremy Gaunt.)