LONDON – France, Spain and Italy dragged the euro zone into a deeper downturn in February, according to business surveys that showed the chasm between these countries and prosperous Germany widening yet again.
While British services companies had a slightly better month than expected, Tuesday's purchasing managers' indexes (PMIs) showed deepening fractures running through the European economy.
The divide between Germany and France, the euro zone's two biggest economies, grew to its widest since the currency union's inception in 1999.
The PMIs reflected how euro zone businesses were faring mostly before the inconclusive outcome of Italy's general election, which unsettled international financial markets.
"Two months into 2013, we've been somewhat disappointed with the euro zone economy's progress. The PMIs again reaffirm that," said Victoria Clarke, economist at Investec in London.
"Germany's doing a bit better than the rest of the pack, but in general, there's no real sign there of stabilization, or of the contraction at least bottoming out."
Markit's Eurozone Composite PMI, a broad gauge of activity at thousands of companies across the 17-nation bloc, fell to 47.9 in February from 48.6 in January.
Although that was a little better than a preliminary reading of 47.3, it was still well below the 50 mark dividing growth from contraction - as the index has been for just over a year.
Euro zone retail sales for January, showing a 1.2 percent rise, were much better than expected, although economists cautioned that the underlying picture was still very weak.
British retail sales also grew at their strongest annual rate in almost two years last month.
The euro rose slightly against the dollar in response to the data. European stock markets also rallied on Tuesday, although led by strong bank results.
Britain's services PMI, which accounts for the bulk of its economy, hit a five month-high of 51.8 last month from 51.5 in January, beating the median forecast of 51.0 in a Reuters poll.
Economists expect comparable data from the United States will show its non-manufacturing economy maintained a moderate rate of growth, slowing only slightly since January.
Growth among Chinese services companies, which comprise a smaller proportion of its economy compared with Western peers, slowed from a four-month high in February.
BETTING ON THE BANK
For the euro zone, the outlook depends largely on whether Germany can keep up its economic growth and offset struggling France, Italy and Spain, according to Chris Williamson, chief economist at PMI compiler Markit.
"(That) seems a tall order, meaning hopes of a return to growth for the region by mid-2013 are now looking too optimistic," he said.
For Germany-France divergence PMI chart: http://link.reuters.com/jyd95t
Williamson said the latest surveys were consistent with the euro zone economy shrinking around 0.2 percent this quarter, with only German strength saving the bloc from a downturn as bad as the 0.6 percent decline at the end of last year.
The European Central Bank meets to decide monetary policy this week, although few economists expect any major announcements this month.
Whether the Bank of England will act this month to help boost the economy is a tougher call, despite Tuesday's unexpectedly strong services PMI.
Before the data, economists polled by Reuters put a 40 percent median chance on the Bank of England adding to the 375 billion pounds it has spent so far on its asset purchasing program.
However, the upbeat services number follows dire construction and manufacturing PMIs from the last few days.
"Maybe a small glimmer of hope is showing through for the UK services sector amidst deepening gloom for the UK economy," said David Brown from New View Economics.
He said it was far too tenuous to suggest the services PMI means there was some uplift in economic activity this quarter, taken together with the poor manufacturing data.
(Graphic by Vincent Flasseur. Editing by Jeremy Gaunt)