Euro business activity shrinks and U.S., China output slows

NEW YORK/LONDON (Reuters) - Business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed U.S. factory growth, surveys showed on Thursday.

The data darkened the outlook for the world economy, adding to fears that Europe's debt crisis and slower growth in the United States and Asia would cause downturns around the globe.

On Wednesday, the U.S. Federal Reserve extended a stimulus program to help boost growth and said it was ready to do more if Europe's debt crisis were to worsen.

According to financial information firm Markit, the 17-country euro zone's private sector shrank in June at its fastest pace in three years. Activity declined across the euro zone, including in its largest economy Germany and in France.

Analysts said that should raise pressure for the European Central Bank to follow the Fed's lead and take further action to support the economy.

"We are at the point where the economy is increasingly losing traction and it's hard at this stage to see what will give us a lift. The ECB will do more, that will probably involve a rate cut - which is symbolic - but is action," said Peter Dixon at Commerzbank.

Markit's euro zone Flash Composite Purchasing Manager's Index for June, which comprises the service and manufacturing sectors, fell to 46.0. It has contracted for nine of the last 10 months. A reading above 50 indicates expansion.

"The only remotely positive spin that can be put on the dismal euro zone (PMI) is that there was no further deepening in the overall rate of contraction. Hardly a cause for celebration," said Howard Archer at IHS Global Insight.

The data pointed towards a second quarter contraction of around 0.6 percent, Markit said.

Germany's factory sector contracted at its fastest pace since June 2009 and its services sector barely expanded, while in France, activity in both sectors declined.

The danger of Greece exiting the euro zone eased after pro-bailout parties won weekend elections, but risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.

U.S. MANUFACTURING LOSES MOMENTUM

Europe's sluggish growth also affected U.S. manufacturing, which Markit said grew at its slowest pace in 11 months in June. Hiring also slowed, with firms adding employees at the slowest pace in eight months.

"The impact of weak sales on employment is a key concern," said Markit chief economist Chris Williamson. "The close fit of the survey data with non-farm payroll number suggests that the official (employment) data for June will show a further weakening of the labor market."

Job growth in the United States slowed sharply for a third consecutive month in May and the unemployment rate rose for the first time in nearly a year.

Slower growth in China and other large emerging market economies also hit demand for U.S. goods, Markit said. The company's U.S. Flash Manufacturing Purchasing Manager's Index fell to 52.9 in June from 54.0 in May.

A separate report showed that factory activity in the U.S. Mid-Atlantic region contracted for a second straight month as new orders tumbled.

Manufacturing has been a bright spot in an otherwise fragile U.S. recovery, but recent data suggests things may be changing.

"It's a pretty horrendous result. We had thought we would have a pay back from last month's drop," said Jeremy Lawson, senior economist at BNP Paribas. "This suggests the weakness is genuine."

CHINA CRACKS

China's factory sector shrank for an eighth straight month in June as export orders sentiment hit its weakest level since early 2009. Economists said that suggested a broad slowdown in the economy may extend into the third quarter.

The HSBC Flash Purchasing Managers Index, the earliest monthly indicator of China's industrial activity, fell to a seven-month low of 48.1 in June from 48.4 in May.

That marked the eighth consecutive month that the HSBC PMI has been below 50, matching a similar streak during the much deeper slowdown during the global financial crisis of 2008-2009.

Economic growth in the world's most populous nation is widely expected to have slid for the sixth straight quarter in April through June as the country feels the impact of the euro area debt crisis and as property controls hurt domestic demand.

Connie Tse, an economist at Forecast Ltd in Singapore, said she sees an "increasing chance" that second-quarter annual growth will edge close to 7 percent, which would be the weakest pace of expansion since early 2009 but way ahead of its European counterparts.

As recently as May, a Reuters poll had a median forecast of 7.9 percent for the second quarter.

"Conditions of China's manufacturing sector, especially the small and medium sized factories, continued to slip. We see little probability of this series moving back into the expansion zone in the next two months," said Yao Wei at Societe Generale.

(Additional reporting by Lucy Hornby in Beijing.; Editing by Chizu Nomiyama)

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