Euro zone services downturn continues

The euro zone's private sector downturn eased only slightly in June as companies slashed prices, according to business surveys today that supported expectations the European Central Bank will cut interest rates this week.

Markit's Eurozone Composite Purchasing Managers' Index (PMI), which surveys thousands of companies, was revised up in June to 46.4 from a preliminary reading of 46.0 that matched the May figure.

The index has been below the 50 mark that separates growth from contraction for nine of the last 10 months, suggesting the economic rot has spread to the core of the euro zone.

The PMIs have a good record of tracking economic growth and suggest the euro zone economy contracted 0.6 per cent in the second quarter, which would be the largest quarterly decline in three years.

Economists in a Reuters poll last week expected the ECB will cut interest rates to a new record low 0.75 per cent tomorrow to help spur growth, and the PMIs will do little to alter that view.

"Even Germany looks to have fallen into a renewed decline, though only a very modest drop in output is signalled. The pace of downturns in other major euro member states is far more worrying," said Chris Williamson, chief economist at data provider Markit.

He said output in Italy probably declined 1 per cent in the second quarter, with steep downturns also on the cards in Spain and France.

"Job losses are mounting as a result of falling demand, as companies seek to reduce costs and prepare for the possibility that worse is to come," he added.

The euro zone unemployment rate rose to a new record high of 11.1 per cent in May, meaning some 17.6 million citizens were out of work across the 17-nation currency union.

And the composite PMI showed little sign of relief for workers - firms cut jobs for the sixth straight month as the employment index fell slightly to 48.3 in June from 48.5 in May.

While the services PMI also edged up slightly to 47.1 in June from 46.7 in the previous month, it was still anchored below the 50 mark for a fifth straight month.

It did however suggest inflation pressures are abating, as the prices charged by companies to consumers declined at the fastest rate in around two-and-a-half years. The output price index dropped sharply to 46.8 from 49.0 in May.

A sharp fall in oil prices held inflation steady at a 16-month low of 2.4 per cent in June, cited by many economists as a a major reason why the ECB may cut interest rates this week.

Reuters