It looks like the economic worm is finally turning for Europe, while China’s economy is facing increasing headwinds and might even be heading for a less than soft landing. They say what goes around, comes around, and that seems to hold true for both colds and economic cycles.

According to recent economic data from Societe Generale, European mainstays Germany and the UK have made significant progress in deleveraging corporate balance sheets and are poised for significant economic growth. Things are not looking so rosy for China, however, according to a Cross Asset Research report published today. That report highlights the significant drop in the HSBC/Markit manufacturing purchasing managers index in January as further evidence of an economic slowdown in China.

Germany and the UK to lead Europe forward

The Cross Asset report focuses on deleveraging as the key factor underpinning an economic recovery after a bubble-induced recessionary cycle. The analysts argue that businesses in both Germany and the UK have bitten the bullet over the last few years, and develeraged their balance sheets to the point that an economic recovery can proceed apace.

The report also points to a divergence among European nations, in that Germany and the UK have reduced private consumer debt, while the rest of the Euro area has barely begun the process. “According to our estimates, household debt-to-GDP ratios in the UK, the US and Germany have plunged by 15 points of GDP on average since 2007.”

China Household debt sector

China PMI means slowdown has begun

China’s HSBC/Markit manufacturing PMI suffered a sharp drop to 49.6 in January, down from the already anemic 50.5 final reading in December. These numbers were significantly below analyst expectations. Production managed to stay above 51, but new orders decreased a depressing 2 points. The January employment number also decreased by a point from December, coming in around 47.8.
China PMI
The Cross Asset Research report offers a less than sanguine take on near-term Chinese economic growth. “December activity data already showed a number of signs of weakening growth momentum, and this latest survey offered more evidence. We expect more soft data prints ahead, as the impact of slowing credit growth seeps through to the real economy”