Euro zone's economy moving forward 'with the handbrake on'

THE EURO zone’s economic recovery is still failing to pick up steam, with service-sector companies struggling to keep pace with export-led growth in manufacturing, a closely-watched survey showed yesterday.

February’s disappointing purchasing managers’ indices (PMIs) for the 16-country region followed last week’s news that euro zone gross domestic product increased just 0.1 per cent in the last three months of 2009, and was left trailing by the US.

They added to evidence that the recovery under way since the middle of last year remained pedestrian. “We are still moving forward with the handbrake on,” said Christoph Weil, economist at Commerzbank in Frankfurt.

Concern about the sustainability of the recovery is likely to strengthen expectations that the European Central Bank (ECB) will keep its main interest rate firmly on hold at 1 per cent for much of this year.

The turnaround has largely reflected the revival in global export opportunities, with domestic growth still dependent on emergency government stimulus measures. The severe winter is likely to have further hit activity since the start of the year.

However, the ECB is almost certain to press ahead with plans to remove extra support for financial markets provided since the collapse of Lehman Brothers in September 2008.

It could reintroduce the pre-crisis auction system for some three-month liquidity offers, while continuing to meet in full banks’ demands for funds in weekly operations.

The euro zone purchasing managers’ indices are regarded as timely indicators of underlying trends in economic activity.

February’s latest “composite” index, covering services and manufacturing, stood at 53.7, unchanged from January but down from December’s two-year high of 54.2.

Given that a figure above 50 is consistent with an expansion in activity, that suggested growth continued. However details of the survey showed the recovery being powered increasingly by industry alone.

The manufacturing index jumped from 52.4 in January to 54.1 in February, the highest since August 2007. But in services the index slipped from 52.5 to 52.

“While the recovery continued, consistent with GDP rising by approximately 0.4 per cent in the first quarter so far, it was unbalanced and concerns persisted about its sustainability,” said Chris Williamson, chief economist at Markit, which produces the survey.

Country PMIs showed manufacturing did particularly well in Germany. A more detailed breakdown, when published, is likely to show the overall euro zone performance was dragged down by contractions in activity in “peripheral” member states such as Spain and Greece. – (Copyright The Financial Times Limited 2010)