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Tags: eurozone | business | ecb | rate cut

Europe's Economic Gloom Deepens; Rate Cut Expected

Wednesday, 04 July 2012 09:52 AM

All of Europe's biggest economies are in recession or heading there and there is little sign things will improve soon, surveys showed on Wednesday, backing a growing view the region's major central banks are poised to ease policy this week.

Business surveys covering thousands of companies suggested the eurozone economy returned to contraction between April and June, and that Britain's mild recession extended into a third straight quarter.

The latest batch of purchasing managers' indexes did nothing to alter expectations the European Central Bank will cut interest rates to a record low on Thursday, or that the Bank of England will turn its printing presses on again to buy bonds.

"The PMIs are bottoming out at a level consistent with further contraction of activity in the second quarter," said James Nixon, chief European economist at Societe Generale, of the eurozone PMIs.

Markit's Eurozone Composite PMI was revised up in June to 46.4 from a preliminary reading of 46.0 that matched the May figure, but the index has undercut the 50 mark that divides growth from contraction for nine of the last 10 months.

"We are looking for GDP to decline by 0.3 percent in the euro area in Q2 and these numbers are perfectly consistent with that," Nixon said.

PMI compiler Markit said the surveys were consistent with a 0.6 percent contraction for the eurozone economy in the second quarter, and 0.1 percent for Britain.

Worryingly, there were clear signs that Germany, Europe's biggest economic engine, is also entering a modest downturn. Its services sector unexpectedly stagnated in June, as its PMI reading fell to its lowest since September last year.

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

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

Perhaps the only bright spot in the PMIs was a sharp drop in price pressures among companies in the eurozone, suggesting inflation will decline in coming months.

A sharp fall in oil prices held inflation steady at a 16-month low of 2.4 percent in June, cited by many economists as a major reason why the ECB may cut interest rates this week by 25 basis points to a record low 0.75 percent.

News eurozone retail sales rose 0.6 percent in May after falling 1.4 percent in April failed to overcome the gloomy mood in markets, as European shares retreated from two-month highs on Wednesday after three days of gains.

U.S. data, due on Thursday on account of the Independence Day national holiday, is also expected to show growth of activity among American services firms slowed in June.


The PMIs showed little sign of relief for workers - eurozone firms cut jobs for the sixth straight month in June, suggesting the currency union's record unemployment rate of 11.1 percent in May has further to climb.

"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," added Williamson.

While the eurozone's 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.

Britain's dominant service sector, which accounts for the vast majority of its private economy, grew at a much weaker pace than expected last month, as the PMI fell to 51.3 from May's 53.3 compared with an expected 52.8.

The latest round of gloomy data will solidify expectations the Bank of England will start another round of quantitative easing (QE) asset purchases when it meets on Thursday.

"The sharp deterioration in June's UK CIPS services survey seals the deal for more QE tomorrow," said Vicky Redwood, chief UK economist at Capital Economics.

"If we are right in thinking that the surveys have underestimated the impact of June's extra bank holiday, the economy is actually probably still in recession."

Faced with a struggling economy, the BoE is expected to flood markets with another 50 billion pounds of cash this week, on top of the 325 billion pounds it has already pumped in, according to a Reuters poll taken last week.

News from Asian PMIs on Wednesday was fairly mediocre, too. China's developing service sector grew at its slowest pace in 10 months in June, hit by new order growth pushing the PMI down by over two points to 52.3 from 54.7 in May.

© 2022 Thomson/Reuters. All rights reserved.

Wednesday, 04 July 2012 09:52 AM
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