Economies: China’s Still Travelling Well, Pity About The Rest

So which was the more important of yesterday's announcements?

The pea and thimble trick in Washington to resolve the debt ceiling problem, or the two surveys of Chinese manufacturing that clearly confirm the most important economy for Australia isn't tanking?

Well, I'd take the latter, over the former, which remains a fiddle and of no lasting importance except, hopefully, to remove the threat of the US defaulting on its debts.

The two manufacturing surveys had some impact in the relief rally in Asian markets yesterday.

In contrast a very weak report on US manufacturing overrode the euphoria about the debt ceiling deal and sent Wall Street lower.

Weak surveys from Europe had a similar impact.

But for Australia, the two Chinese surveys confirm the country's economy is not crash landing, and that it is going to continue growing and consuming as much as it can get its hands on for the next while.

In fact the final HSBC/Markit survey was a touch stronger than the flash estimate a week or so ago.

The HSBC/Markit monthly purchasing managers index fell to 49.3, the lowest final reading since March 2009, compared with 50.1 in June.

That was up on the 48.9 result in the flash estimate.

Compared with earlier in the year when the survey produced results of over 54.

The data confirmed the slowing growth momentum in the manufacturing sector that started in February.

The slow down has come "Against the backdrop of sustained tightening and lackluster external demand," Hongbin Qu, HSBC's chief economist for China, said in a statement accompanying the data.

But there are signs of stabilisation in both the HSBC and the official PMI.

"That said, the current level of the PMI is still consistent with a 12%-13% growth rate of industrial production, which leaves room for Beijing to keep tightening policy through [the third quarter] to check inflation," HSBC's Qu said in the statement.

Output growth at that level is still very solid (and at the level seen in the June quarter).

The HSBC PMI survey results were released a few hours after the official PMI survey from the China Federation of Logistics and Purchasing, which also showed a further slowdown in activity at Chinese factories in July.

The CFLP data showed China's PMI slipped to 50.7 in July from 50.9 in June, but remained above the expansion/contraction level of 50.

Credit Suisse's China economist Dong Tao said the CFLP PMI data should ease concerns about a "hard landing" for the nation's economy, though it still signals that growth is moderating.

"We believe that the July PMI data will not alter the policy track Beijing has set for [the second half of 2011]. In case the economy slows down more than expected, we think that it would be fiscal stimulus, rather than monetary easing, that would come to the rescue," Tao wrote in a report.

"Cyclically, the July PMI tends to be one of the weakest and is usually followed by a strong rebound in August. As industrial production rebounded in June, we believe the PMI will also start to climb in the coming months," ANZ economists said in a research note.

A rise in a sub-index measuring new orders pointed to a reasonably healthy business pipeline for manufacturers.

As the sub-index for new export orders fell at the same time, the increase in overall new orders was a testament to resilient domestic demand in China.

The PMI shows that the "economy is trending towards a stabilisation", the China Federation of Logistics and Purchasing said in a statement accompanying the release of the data.

Data released by HSBC and the CFLP diverged on input price inflation.

The CFLP's survey found that a sub-index of input prices eased to 56.3 in July from 56.7 in June.

However, HSBC said its own survey showed that material costs rose slightly in July from the previous month, although the extent of the increase was "muted".

"Companies that reported an increase in cost burdens generally commented on higher raw-material prices," HSBC said in its statement.

"Meanwhile, prices charged by manufacturers for their final product rose only marginally, with the rate of inflation easing to the slowest in the current one-year period of higher average tariffs," HSBC said.

In the US, manufacturing activity barely grew in July, supporting the idea that the economy has slowed sharply and unexpectedly so. The Institute for Supply Management's manufacturing gauge in July dropped 4.4 points to 50.9, the worst reading since July 2009. The index came in far below forecasts for a reading of 54.3. Wall Street fell after the ISM report, converting a 139 point bounce on the news of the debt ceiling agreement to a loss of around 35 points.

The survey showed that April, the ISM index has slumped 9.5 points, the worst three-month dip since the September-to-November 2008 period when Lehman Brothers collapsed.

The new orders index fell into contractionary territory for the first time since mid 2009, and indexes for prices and employment in particular saw big drops.

The prices index has dropped a stunning 26.5 points over the past three months. The employment gauge fell 6.4 points to 53.5.

It was a similar story in Europe, the purchasing managers index for the euro-zone manufacturing sector fell to 50.4 in July.

That was down from 52.0 in June and matching a preliminary estimate. The figure is the lowest since October 2009.

A reading of more than 50 indicates growth in activity, while a figure of less than 50 signals a contraction.

The data confirmed a slowdown in activity across the euro zone, with the German manufacturing PMI slipping to a 21-month low at 52.0, while France slid to a two-year low at 50.5. Spain and Greece both showed contractions in manufacturing activity with readings of 45.6 and 45.2, respectively. "The breadth of the deterioration in order inflows is striking, with declines in new business seen not only in the periphery but also in the now rapidly-cooling core nations of France and Germany," said Rob Dobson, senior economist at Markit. And manufacturing activity in Britain unexpectedly contracted in July, marking the first monthly decline in two years, according to the Markit/CIPS purchasing managers index for the sector released Monday. Manufacturing PMI fell to 49.1 from a revised 51.4 reading in June. "Alarm bells are ringing for the U.K. manufacturing sector, which has seen conditions deteriorate rapidly since the start of the year," said David Noble, chief executive of the Chartered Institute of Purchasing & Supply said in a statement. Earlier, the Australian PMI from the Australian Industry Group/PricewaterhouseCoopers showed another fall last month.

The index fell 9.5 points to 43.4 in July, well below the 50-mark point that indicates contraction and falling after a modest rebound in June.

Wood products and furniture was the weakest performing sub-sector of the survey and new orders fell 14.4 points to 40.2 in July.

The high level of the Australian dollar and sluggish domestic demand were again blamed for the fall.