Index says euro zone economy to contract

THE EURO zone economy looks destined to contract in the current quarter, according to a usually reliable survey of business sentiment.

The 17-nation bloc’s economy continued to contract in August, Markit’s Purchasing Mangers’ Index (PMI) suggested.

The euro zone economy shrank by 0.2 per cent in the three months to June, according to official data.

The composite PMI, which measures manufacturing and services together, nudged up to 46.6 in August, pipping forecasts for it to hold steady at July’s 46.5. However, that notched a seventh month below 50, the dividing line between contraction and growth.

More worryingly, the rot in smaller euro zone economies is now taking root in the core, with the flash composite PMI for Germany falling to a three-year low. This marks a fourth straight month of contraction.

“Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating, and further signs that its export engine has slammed into reverse gear,” said Rob Dobson, senior economist at data compiler Markit.

Incoming orders for euro zone companies have now fallen for a full year, with the composite sub-index at 45.0, above July’s three-year low of 44.5.

French business activity contracted for the sixth consecutive month, according to its composite PMI.

Economists polled by Reuters last week predicted a similar outcome for the current quarter, with no growth until the start of next year. Interest rates are already at record lows and the European Central Bank is expected to cut them by 25 basis points to 0.5 per cent when it meets next week.

The PMI for the dominant services sector fell to 47.5, missing expectations for a more modest fall to 47.6 from July’s 47.9. That came as services firms cut the prices they charge for the ninth straight month. The output prices index rose to 47.2 from 46.8. The manufacturing PMI spent a 13th month below 50 but rose much more than expected to 45.3 from 44.0. – (Reuters)