Global economy begins second half of 2015 on shaky ground

LONDON/NEW YORK (Reuters) –The global economy started the second half of the year on shaky ground with China’s factory sector activity contracting in July at the fastest pace in 15 months and euro zone manufacturing weaker than expected, although US activity picked up.

The purchasing managers indices (PMI) for the manufacturing sector from private data vendor Markit come after Beijing said it would allow its yuan currency to fluctuate more widely within its trading band as a way to support trade and despite the European Central Bank’s 60 billion euro a month bond-buying program.

The preliminary Caixin/Markit China PMI for July dropped to 48.2, the lowest reading since April last year. It was the fifth straight month under the 50 level separating expansion from contraction.

The fall confounded forecasts for a rise to 49.7 from June’s final reading of 49.4 and pushed the Australian dollar to a six-year low . China is Australia’s biggest export market.

Fears of faltering demand in China, the world’s largest commodity buyer, put pressure on other commodity prices, with copper falling to its lowest level since 2009.

The survey of executives in over 420 Chinese manufacturing firms found output, new orders and export orders all decreased.

“Today, it’s big, bad news with this number well below consensus,” said analyst Helen Lau of Argonaut Securities in Hong Kong. “It shows there’s no signs of recovery in small and mid-sized business in China, but I think it’s also related to the summer weak season for demand.”

The China survey overshadowed better news from Japan, where the flash Markit/Nikkei PMI rose to a seasonally adjusted 51.4 in July from a final 50.1 in June, a welcome hint of economic acceleration after a surprise slowdown last quarter.

The ongoing factory output contraction reflected in Friday’s China survey is likely to fuel speculation that Beijing will accelerate the pace of loosening monetary policy to try to stoke activity in the wake of the recent China stock market slump.

Economists polled by Reuters this month said they expect China to reduce interest rates by 25 basis points before year-end. The amount of cash that Chinese banks must hold as reserves was also expected to be reduced to keep the Chinese economy growing at seven percent this year, the slowest pace in a quarter of a century.

“The central bank will maintain its loose monetary policy in the second half this year, and it will continue to apply different methods to control liquidity,” Zhu Haibin, economist at JP Morgan in Beijing, said on Wednesday.

Euro zone business activity started the second half on a less secure footing than expected as euro weakness failed to boost export demand.

Markit’s Composite Flash Purchasing Managers’ Index, based on surveys of thousands of companies and seen as a good guide to growth, fell to 53.7 in July from June’s four-year high of 54.2. A Reuters poll had predicted a more modest dip to 54.