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Business growth slows in China and Europe, Russia sanctions still to bite

By Jonathan Cable and Xiaoyi Shao

LONDON/BEIJING (Reuters) - Business growth in China and across Europe slowed this month, surveys showed on Thursday, providing more evidence that the world economy is stuttering and may need more monetary stimulus to keep it going.

Euro zone private business activity expanded slower than expected in August, despite widespread price cutting. This is before the full effects of sanctions imposed on and by Russia over Ukraine are felt.

Meanwhile, China's manufacturing activity hit a three-month low in August and a Reuters poll showed Japan's economic recovery is likely to be modest despite a small acceleration in the factory sector.

Data due later from the United States is expected to show a similar slowdown.

"If you take all these things together we are clearly looking at a global economy that doesn't have a huge amount of momentum behind it," said Peter Dixon at Commerzbank.

Markit's Composite Purchasing Managers' Index (PMI) for the euro zone will provide gloomy reading for the European Central Bank (ECB) as it showed the big two economies of Germany and France struggling.

Based on surveys of thousands of companies across the region and a good indicator of overall growth, the Composite Flash PMI fell to 52.8 from July's 53.8, far short of expectations in a Reuters poll for a modest dip to 53.4.

However, readings above 50 do indicate expansion and Markit said the data point to third-quarter economic growth of 0.3 percent, matching predictions from a Reuters poll last week.

But there are challenges facing the economy now that it didn't have to worry about a few months ago.

Europe and others in the West imposed economic sanctions on Moscow over the Kremlin's support for rebels in eastern Ukraine, prompting a tit-for-tat response from Russian President Vladimir Putin.

"It is clearly premature to start fretting about a new downturn," said Martin van Vliet at ING. "That said, with geopolitical tensions increasingly posing a threat to the subdued and fragile upturn it is clearly premature to assume that the ECB's easing work is fully done."

Companies in Europe are beginning to show signs of strain.

Germany's Adidas , the world's number-two sportswear firm, cut its profit target due to the rouble's fall and increasing risks to Russian consumer sentiment. Brewer Heineken said its sales volume in Russia fell by a "low-double digit" percentage.

The composite PMI in Germany - Russia's biggest trade partner in the European Union which has already seen exports to the country plunge in the first half of the year - fell to 54.9 from 55.7. For France, the euro zone's second largest economy, the Composite PMI rose from 49.4 to the break-even mark at 50, meaning it is neither expanding nor contracting.

In Britain, which does not use the euro, consumers have been the main driver of the country's economic recovery which began last year. But retail sales rose in July at a weaker pace than expected.

ASIAN STUMBLE

The PMI for Japan showed factory activity accelerated in August as export and domestic demand increased, in another sign the economy is steadying after shrinking in the second quarter due to a sales tax increase.

But the Reuters Tankan survey indicated the economic recovery is likely to be modest, which could keep pressure on the central bank to act to sustain growth in the world's third largest economy.

HSBC/Markit's Flash China Manufacturing PMI fell to 50.3 in August from July's 18-month high of 51.7, badly missing a Reuters forecast of 51.5 but just above the 50 threshold.

"The sharp drop in the PMI is perhaps not surprising given last month's disappointing activity and lending data. That said, we are not expecting a rapid deterioration in economic momentum," Julian Evans-Pritchard, China economist at Capital Economics, wrote in a note.

"Meanwhile, we expect the government to continue to fine tune policy as necessary to prevent growth from slipping too much over the coming quarters."

A burst of policy stimulus since April lifted China's annual economic growth to 7.5 percent in the second quarter - in line with the full-year official growth target - from 7.4 percent in the first quarter - the weakest pace in 18 months.

But with conditions looking increasingly unsteady into the third quarter as policy support moderated, some analysts say even more stimulus may be needed in coming months to bolster growth and offset the downdraft from the housing market.

"Definitely there will be more measures to keep growth momentum steady in coming months," said Zhu Qibing, an economist at Minzu Securities in Beijing. "But we don't expect interest rate cuts in the near term as the central bank has reiterated that it would keep its prudent monetary policy unchanged."

Similarly, no action is expected from the ECB in the coming months as it waits to see what effect another round of temporary access to cheap cash for banks has on inflation and growth.

Consumer prices in the euro zone rose just 0.4 percent on the year in July, the weakest annual rise since October 2009 at the height of the financial crisis, and well within the ECB's "danger zone" of below 1 percent.

According to the composite output price index firms cut prices for the 29th month - and at a faster rate than in July.

(Additional reporting by Tetsushi Kajimoto in Tokyo Editing by Jeremy Gaunt)

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