Reasons not to retreat

This sounds ominous. World manufacturing has just had its worst month in three years. But there are still reasons to be cautiously optimistic about the global economy. One of them is that Europe has done something to defuse its ticking time bomb, even if the Euro zone crisis is far from over.

According to a survey of purchasing managers, US manufacturing output fell in June, the first monthly fall in three years. But the decline was small: a reading of 49.7 in an index that shows unchanged output at 50. And a sub-index for hiring by manufacturers read a far more encouraging 56.6. US manufacturers wouldn’t be recruiting if they were without hope. Housing data, meanwhile, is improving, with small price increases in the past three months.

China also unsettles. Surveys have shown its manufacturing at a standstill or contracting slightly for months. But services are doing much better — that purchasing managers’ index scored a healthy 56.7 in June.

The disparity between manufacturing and services points not only to something bad — weak global sales — but also to something good: a rebalancing of growth. As services still make up less than half of China’s GDP — compared with more than two-thirds in most developed economies — there is plenty of scope for more.

The heart of the global problem is Europe. The current output picture there is bleak, with a Euro zone manufacturing PMI at just 45.1 in June. And yet things could be still worse. Greece has not crashed destabilisingly out of the euro and the region’s leaders took some tentative steps towards strengthening zone defences last week.

They decided to help banks directly, not through national governments, and to consider letting the region’s bail-out funds buy government debt, making an explosion in Spanish and Italian debt spreads less likely. This week the European Central Bank might even cut rates.

The prospect of the distancing of crisis encouraged investors. It may also bolster the confidence of firms, both in the Euro zone and outside it. A belief that Europe won’t immediately blow up could spur global investment — and keep the global economy from retreating into its shell.