Euro zone private sector shrinks

Wed, Nov 23, 2011, 00:00

The euro zone's private sector contracted for a third month in November as a downturn that started in periphery countries has spread to core members of the currency region, surveys showed today.

The surveys point to the euro zone economy shrinking 0.5-0.6 per cent in the fourth quarter, after 0.2 percent growth in the third quarter, data compiler Markit said, and suggest things are unlikely to improve anytime soon.

While the region's dominant service sector contracted less than expected this month, its manufacturing sector, which fuelled a large part of the last recovery, shrank more than thought as output fell to its lowest level since mid-2009.

The Flash Markit Eurozone Services Purchasing Managers' Index (PMI), which tracks business activity at thousands of firms across the 17-nation euro zone, rose to 47.8 this month from October's 46.4, beating expectations for 46.5.

But this is the third month the index has been below the 50 mark that divides growth from contraction, taking its toll on firms' outlook.

The business expectations index fell to 52.5 from October's 52.7 and its weakest showing since March 2009 which was not long after the region had passed the darkest point in the last recession.

"That indicator continued to come down which doesn't auger well for the sector and suggests that service sector growth will continue to weaken," said Chris Williamson at Markit.

"Alongside a manufacturing weakness it is setting the scene for a weak start to the new year. One of the worrying signs in manufacturing is that the rate of decline is gathering momentum."

The euro zone's manufacturing PMI fell to 46.4 in November from 47.1 last month, its lowest reading since July 2009 and shy of expectations for a smaller dip to 46.5.

The output index, which feeds into the broader composite survey that combines manufacturing and services, fell to 45.8 from 46.6 in October.

Worryingly, part of that remaining activity was driven by firms winding down backlogs of work at the fastest pace since June 2009, with the index falling to 43.6 from 44.0.

Germany, the region's backbone, saw a deeper contraction in its manufacturing sector than was expected this month but its service sector confounded economists by growing rather than stagnating, earlier data showed.

It was a similar scenario in France, the euro zone's second largest economy, with its service sector PMI remaining sub-50 but bouncing to 49.3 from 44.6 whereas its manufacturing index fell to 47.6 from 48.5.

"It very much looks like Germany and France have been infected by the debt crisis worries," said Mr Williamson.

There is a 60 per cent chance the region slips back into recession in the next year, a Reuters poll predicted this month, as the debt crisis continues unabated and economic data fails to provide any cheer.

The euro zone composite PMI, often used as a barometer of growth, nudged up to 47.2 in November from October's 28-month low of 46.5, marking its third month below 50.

"There is a heightened risk of contraction in the fourth quarter. It's depending on what happens in December but on the basis of new orders still falling and confidence low we are going to see another month of contraction," Mr Williamson said.

But despite the lack of new business firms passed on some of the rising input costs to consumers with the output price index rising to 50.4 this month from 49.2.

Inflation held at 3.0 per cent for a second month in October, but economists said it had probably peaked and would soon fall, giving the European Central Bank room to cut interest rates and focus on restoring growth.

The ECB, which targets inflation at just below 2 per cent, lopped 25 basis points from interest rates this month and new bank president Mario Draghi is seen following that up with a similar cut in the near future.

Mr Draghi, who only took on the top job a few weeks ago, warned at the central bank's November meeting that the region could subside into a "mild recession" by the end of the year.

Reuters