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Chinese, U.S. factories struggle, Europe still in slump

An investor looks back in front of an electronic board showing stock information filled with green-coloured figures, which indicate falling
An investor looks back in front of an electronic board showing stock information filled with green-coloured figures, which indicate falling

By Jonathan Cable and Steven C. Johnson

LONDON/NEW YORK (Reuters) - Factory output in China weakened to a nine-month low in June while U.S. manufacturing closed out its worst quarter in the last four, suggesting the road to recovery for the world economy remained an uneven one.

A day earlier, the Federal Reserve said the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its stimulative bond purchases later this year.

Other major economies are lagging America's, however, which could limit the strength of global growth. China, the world's second largest economy, grew at its slowest pace in 13 years in 2012 and incoming data this year has been weaker than expected.

That's evident in the country's large manufacturing sector, which, according to the flash HSBC Purchasing Managers Index, contracted again in June as demand fell.

"A slowdown in the Chinese economy doesn't help the outlook for the U.S. particularly, but American growth isn't entirely dependent on what happens in China," said Philip Shaw, chief economist at Investec.

U.S. growth picked up in the first three months of the year, boosted partly by a recovering housing market, though the pace is expected to drop off in the second quarter.

Manufacturing in particular has struggled. According to information service Markit's latest survey, the second quarter was the worst for the sector in the last four as the pace of hiring and overseas demand weakened.

"Companies are certainly circumspect about any sustained revival of demand," said Markit chief economist Chris Williamson, who added that employment was also being suppressed by "the need to boost productivity, especially with intensifying competition from overseas and in export markets."

Recession in the 17-country euro zone has contributed to that lack of demand. While Markit's Flash Eurozone Composite PMI edged up this month, it remained below the dividing line between growth and contraction.

But economists expect the U.S. economy to rebound in the second half and beyond, an outlook shared by Fed Chairman Ben Bernanke, who said on Wednesday that solid growth and an expected decline in the jobless rate mean the central bank would likely begin winding down its stimulus program before the year is out.

Separate data on Thursday showed factory activity in the U.S. mid-Atlantic region at its highest level in more than two years.

EUROPE, CHINA FRAGILE

The euro zone PMI was at its highest since March 2012. But the index has been below the 50 mark dividing growth from contraction for 21 of the last 22 months.

A PMI covering services firms, which make up the bulk of the bloc's economy, jumped to 48.6 last month from 47.2, its highest since January but its 17th straight month below 50.

Markit said the latest PMI data suggested the economy would contract 0.2 percent in the current quarter.

The European Central Bank has come under growing heat to take more action to help bring a quicker end to the bloc's longest recession, but economists polled by Reuters last month did not predict any easing of policy in coming months.

China's central bank may also come under pressure to ease policy as weak demand hurts its big exporters. But while the pace of growth is slowing, few expect a hard landing.

"The chance of economic growth slipping below 7 percent is quite low, because existing measures are still effective in helping stabilize the economy," said Wang Jin, analyst at Guotai Junan Securities in Shanghai.

(Additional reporting by Kevin Yao in Beijing; Editing by Chizu Nomiyama)

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