Global economy set to end year in brittle state

The global economy is ending the year in a fragile state with factory activity shrinking in China, euro zone business growth remaining weak, and emerging market giant Russia in a spiralling currency crisis.

"These are uncertain times again and there is a risk of another global downturn," said Stephen Webster, chief European economist at 4CAST. Poor to mediocre business surveys in Asia and Europe released on Tuesday are likely to put pressure on both the European Central Bank and People's Bank of China to come up with more stimulus.

Eurozone data

Euro zone businesses are ending 2014 in slightly better shape than thought but growth remains weak and firms are still cutting prices to encourage trade, surveys showed on Tuesday.

Markit’s Composite Flash Purchasing Managers’ Index, based on surveys of thousands of companies and seen as a good growth indicator, rose to 51.7 from a 16-month low of 51.1. That beat the forecast in a Reuters poll for a rise to 51.5 but was the second-lowest reading in over a year.

"Overall, it's a very disappointing picture of a weak euro area. It's not any cause for celebration. If it is stabilising, it is at a very weak rate of growth," said Chris Williamson, chief economist at Markit.

December marks the 18th month the index has been above the 50 level that separates growth from contraction. But the expansion has come at a cost: an output price reading of 48.0 showed firms cut prices for the 33rd month. Inflation in the bloc cooled to a five-year low of just 0.3 percent last month, well within the European Central Bank’s “danger zone”, adding to expectations for more policy easing.

Weak growth and deepening concern that plunging oil prices may send the euro zone into a deflationary spiral will push the ECB to buy sovereign debt early next year, a Reuters poll found last week.

A PMI covering the service industry rose to 51.9 from 51.1, beating expectations for 51.5, while the factory PMI posted a similar jump, coming in at 50.8. The Reuters poll had forecast 50.5. An index measuring factory output that feeds into the composite PMI held steady at 51.2.

Taken as a whole, Williamson said the PMIs pointed to fourth-quarter GDP growth of 0.1 percent, weaker than the 0.2 percent predicted in a Reuters poll last week. As an earlier composite PMI covering Germany, Europe’s biggest economy, showed weaker growth and one for France highlighted a continued decline, the euro zone survey suggested there was a renewed upturn in the bloc’s smaller periphery countries.

“The periphery is seeing faster growth but you are in danger that if the core remains weak, that will spread to the periphery and everything will come down again,” Williamson said. Also suggesting the bloc may not have a good start to 2015, services firms, who have become less optimistic about the future, were forced to run down old orders for a seventh month. Factories have done so since May.

Reuters