Euro zone service sector shrinks

Wed, Feb 22, 2012, 00:00

The euro zone's service sector shrank unexpectedly this month, reviving fears that the economy risks sinking into recession, a business survey showed.

Markit's Eurozone Services Purchasing Managers' Index (PMI) fell to 49.4 from January's 50.4, missing even the lowest forecast in a Reuters poll of 44 economists whose predictions centred on a rise to 50.6.

A reading below 50 signifies a contraction.

"There is a possibility GDP will be flat but chances are we could easily slide back into a very small contraction," said Chris Williamson, chief economist at data compiler Markit.

The region's economy contracted 0.3 per cent in the dying months of 2011 so a second quarter of contraction would meet the technical definition of recession. A Reuters poll last week suggested it will probably wallow in a relatively mild downturn until the second half of this year.

The 17-country region's manufacturing sector fared little better, with the PMI barely rising to 49.0 from January's 48.8, spending its seventh month below 50 and missing expectations for a faster rise to 49.5.

The factory output index held steady at January's 50.4 but new orders fell for the ninth month, with the index at 47.1, slightly up from January's 46.5.

"We need order growth to pick up but it is still in decline, they are still relying on their pipeline of previous orders to sustain these levels of activity. In the service sector they are stimulating demand through price cuts, manufacturers are also squeezing their margins," Mr Williamson said.

Although input costs continued to rise, services firms were forced to cut their prices charged for the third month running, with that sub index falling to 48.3 from January's 48.7, its lowest reading since July 2010.

Despite the price cutting to win business, the composite PMI, which combines the services and manufacturing data and is often seen as a growth indicator, fell to 49.7 from last month's 50.4.

The flash data was collected largely before euro zone finance ministers agreed a €130 billion bailout rescue for Greece and Markit said this could lead to sharper than normal revisions when final figures are released at the start of March.

The rescue deal buys time to stabilise the currency region and strengthen its financial firewalls, but it leaves deep doubts about Greece's ability to recover and avoid default in the longer term.

While the debt crisis rages on, euro zone consumer confidence rose for the second consecutive month in February as Europeans showed timid signs of increased spending, official figures showed yesterday.

But earlier data from Germany, Europe's biggest economy and the region's growth engine, showed growth slowed from last month's seven-month high and it was a similar picture in France.

Private sector firms reduced their work force for the second month running in a bid to cut costs with the composite employment index only nudging up to 49.5 from January's 49.4.

"It is not a great sign. There have been widespread job losses in the periphery, which you would expect. More worryingly there was virtually no job creation going on in France and in Germany the rate of growth has eased quite sharply," Mr Williamson said.

Euro zone unemployment reached 10.4 per cent at the end of last year, its highest since the introduction of the European single currency, official data showed late last month. It is seen peaking at 10.8 per cent in the second half of this year.

Reuters