Eurozone Private Sector Continues Struggling, Survey Shows

Politics Reuters

The troubled euro zone's private sector looks set for many more months of pain, July business surveys showed on Tuesday, contrasting with Chinese manufacturers reporting a pick-up in output and signs of stabilisation in new export orders.

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In a further blow to policymakers battling Europe's raging debt crisis -- with Spain now firmly in the bailout spotlight -- the downturn that began in the euro zone's smaller economies has now become entrenched in core countries Germany and France.

The 17-nation euro zone's private sector economy shrank for a sixth month in July. Manufacturing output nosedived, particularly in Germany, making another official recession likely.

Markit's Eurozone Composite PMI, which combines the services and manufacturing sectors and is as a good guide to overall growth, held steady at 46.4, but manufacturing was dire and forward-looking indicators were grim.

The news from China, now one of the world's main economic drivers and the subject of concerns about a harsh slow down, was relatively upbeat, even if it still indicated a contraction.

HSBC's Flash China manufacturing purchasing managers index (PMI) rose to 49.5 in July from 48.2 in June, closer to the 50 level that divides expansion from contraction. The increase was driven by a jump in the output sub-index to 51.2 - the best showing since October 2011.

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It was the first significant set of Chinese data in the third quarter and suggested a series of policy measures, including interest rate cuts, may be starting to work.

"(The PMI) adds to recent signs of stabilisation of the Chinese economy, thus underpinning our view that the slowdown in activity will bottom out over the summer months," said Nikolaus Keis at UniCredit.

Chinese growth cooled to 7.6 percent from a year earlier in the second quarter, its slowest pace in more than three years, but still way ahead of the United States and the euro zone - which has likely fallen back into recession.

For Nomura's chief China economist, Zhang Zhiwei, the PMI provided further evidence that a slowdown in China's economy bottomed out in the second quarter of 2012.

"This suggests the effect of policy easing is being transmitted to the economy and reinforces our view that growth has bottomed in Q2," Hong Kong-based Zhang said.

 

SUFFERING EUROPE

The euro zone composite index has been below the 50 mark that separates growth from contraction for half a year. Data collator Markit said it suggests a quarterly GDP fall of 0.6 percent.

"July's euro zone PMI survey supports the view that the region as a whole is in the midst of a pretty deep recession," said Ben May, economist at Capital Economics.

A Reuters poll predicted last week the bloc's economy would shrink by a much more modest 0.1 percent in the current quarter. Coupled with an expected 0.3 percent contraction in the second quarter, that would put the euro zone in its second recession since 2009.

The PMI for manufacturing, which drove a large part of the recovery from the last recession, fell to a three-year low. While the services PMI slightly beat expectations and was a tad higher. But it also marked a sixth straight month of contraction.

Unlike China, forward-looking indicators in the surveys painted a gloomy picture. The business expectations index fell to a level previously seen when the bloc was last in recession and factory new orders slumped.

Companies also cut their work force at the fastest pace since the beginning of 2010.

"When you have all of the fiscal austerity measures ... why would you want to be hiring at this moment? The question is whether or not this is going to be a permanent state," said Sian Fenner at Lloyds Banking Group.

Manufacturing in Germany, Europe's largest economy, contracted at its fastest pace in over three years and its service sector, which was expected to stagnate, also shrank.

In France factory activity fell at its fastest pace since May 2009 although services grew again. Markit said that upturn was likely temporary, citing a return to business as usual after a presidential election.

The European Central Bank cut its main refinancing rate to a record low 0.75 percent and the deposit rate to zero earlier this month but most analysts see that as a token gesture that can do very little to rekindle economic growth.

A Reuters poll of economists showed the ECB will likely introduce more measures to help stimulate the economy, possibly including more cheap loans for banks.

Growth in the vast U.S. manufacturing sector probably eased this month, according to forecasts for its Flash PMI due later at 1258 GMT.