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Struggling factories underline fragility of world growth

An employee works at a steel factory in Dalian, Liaoning province, May 1, 2013. REUTERS/China Daily
An employee works at a steel factory in Dalian, Liaoning province, May 1, 2013. REUTERS/China Daily

By Jonathan Cable and Langi Chiang

LONDON/BEIJING (Reuters) - Manufacturing across the world stumbled last month, underlining the fragility of the global economy and building the case for more action from leading central banks.

Gloomy purchasing managers indexes - surveys of factory activity that correlate strongly with economic activity - added to a string of other economic data that has already soured optimism that a budding pickup in the world economy will flower.

Over the past two days, manufacturing indexes for the United States, euro zone - including powerhouse Germany - and China have all declined. Britain's improved but was still signaling contraction.

"There is not a great amount of positive news out there. Globally, we do see a weaker second quarter - there are no arguments about that," said Victoria Clarke, economist at Investec.

A survey on Wednesday pointed to a slowdown in the United States, which was soon followed by a signal from the Federal Reserve signal that it would step up its asset purchase program if necessary.

Until recently, analysts had expected the Fed to buy a total of $1 trillion in securities during its ongoing third round of quantitative easing with expectations it would start to take its foot off the accelerator in the second half of this year.

In the euro zone, manufacturing output declined again in April as factory activity in Germany, Europe's largest economy and the world's second-biggest exporter after China, fell for the second month and at a faster pace than in March.

Manufacturers in France, Italy and Spain - the euro zone's next biggest economies after Germany - all reported contraction in business.

Combined, they pushed Markit's Euro zone Manufacturing Purchasing Managers' Index (PMI), based on a survey of thousands of companies across the 17-nation bloc, down to 46.7 last month from March's 46.8. That marked a four-month low but came in ahead of an earlier flash reading of 46.5.

Anything under 50 is seen as a contraction.

Signs of rot spreading in the euro zone will bolster already solid expectations for an interest rate cut from the European Central Bank to a new record low of 0.5 percent later on Thursday.

FRAGILE CHINA

Wednesday's U.S. data from the Institute for Supply Management showed its PMI falling in April to 50.7 from 51.3 with a noticeable pull back in employment growth.

China's growth engine stuttered last month as well. The official PMI fell in April to 50.6 from 50.9 in March, while a comparable HSBC PMI, also reported on Thursday, dropped to 50.4 from 51.6 as new export orders fell.

"The tepid growth momentum is carrying over into the current quarter, thus adding risks to expectations that China's annual economic expansion will pick up to around 8 percent in spring," said Nikolaus Keis, economist at UniCredit.

A Reuters poll suggested growth would pick up in the second quarter to 8.0 percent after 7.7 percent in the first quarter, but analysts said forecasts were now at risk of a downgrade.

But Japan's PMI, released earlier this week, was the highest in just over a year at 51.1, the latest evidence that Prime Minister Shinzo Abe's aggressive economic policies are benefiting the economy.

South Korea's overall PMI also rose in April, as domestic new orders more than offset the impact of the cooling in overseas orders.

(Additional reporting by Reuters bureaux; Editing by Jeremy Gaunt)

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