Eurozone countries get little relief

2012-08-04 15:08

Economic slowdown in big countries is a sign things will get even worse

Europe’s biggest economies endured another torrid month in July as businesses battled slumping demand, according to surveys on Friday that gave scant hope the region will emerge any time soon from a malaise induced by a paralysing debt crisis.

Purchasing managers’ indices (PMIs), which gauge business activity and have a good record of tracking economic growth, showed order books at eurozone companies shrivelled last month as a downturn in Germany and France became more entrenched.

And growth in Britain’s dominant services sector slowed to a crawl in July, casting fresh doubt over whether its economy will rebound from a contraction in the first half of the year.

Overall, the PMIs pointed to a recession-laden second half of the year for most of Europe’s biggest economies, at odds with their portrayal of steady but not spectacular growth in Asia and the United States.

At the heart of the region’s problems is the sovereign-debt crisis, which has pushed government borrowing costs in big economies like Spain and Italy to unsustainable levels and stamped on consumer and businesses confidence.

European Central Bank President Mario Draghi warned the risks to economic growth in the eurozone are on the downside after its policy meeting on Thursday, while sidestepping immediate action to calm the debt crisis.

“If you look at the breakdown by country, it suggests that recession is going to be pretty broad-based and it’s not purely down to developments in the (eurozone) periphery,” said Ben May, European economist at Capital Economics in London.

The composite eurozone PMI rose marginally in July to 46.5 from 46.4 in June, but was still well below the 50 threshold that marks growth.

Survey compiler Markit said it was consistent with a 0.6% quarterly rate of economic decline.

The eurozone narrowly avoided recession in the first quarter this year thanks only to the resilience of Germany.

While Reuters polls of economists last month suggested both Germany and France can still skirt recession, Italy and Spain look destined for painful economic contractions into 2013.

Official data on Friday also showed eurozone retail sales in June came in above expectations, even as growth slowed sharply from the previous month.

But the more forward-looking PMIs augured badly for future business activity in Europe. Eurozone new-business orders collapsed at the fastest rate since June 2009 – a much worse situation than portrayed in the flash reading two weeks ago.

While companies in Italy and Spain performed particularly poorly in July, the PMI showed the eurozone’s biggest and most resilient economy is now floundering too.

“The big worry is that the downturn in Germany may be becoming more entrenched, suggesting the largest euro economies are seeing convergence in collective and mutually-reinforcing decline,” said Chris Williamson, chief economist at Markit.

Germany’s services sector expanded unexpectedly in July, but that failed to offset a manufacturing economy that contracted at its fastest pace in more than three years.

Job losses also mounted among eurozone companies last month, at its fastest pace since January 2010. Britain’s Markit/CIPS services purchasing managers’ index unexpectedly fell to 51 in July from 51.3 in June, its lowest level since December 2010 and only marginally above the 50-mark that separates growth from contraction.

Coming on top of the weakest manufacturing figures in more than three years, and sluggish construction growth, the services PMI pushed Markit’s composite measure of British output growth in July down to 49.5 from 51.1 – its first contractionary reading since April 2009.

Sweden provided a rare bright spot in Europe. Its services sector surged at its fastest pace in more than a year, as the PMI rose above 50 for the first time since March and defied a wider European economic slowdown.

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