EUROZONE: Services Weakness Dents Hopes Of Rapid Recovery

inspector_monkfish

13:37 23Jun09 Services Weakness Dents Hopes Of Rapid Recovery



LONDON -- The euro zone's economic recovery may be further away than policy makers had hoped, with contraction in the services sector gaining pace in June following three months of improvement.

Figures published by Markit Economics Tuesday showed the euro zone's service-sector preliminary purchasing managers index, a closely watched gauge of private-sector activity, dipped to 44.5 in June from 44.8 in May, well below the 45.8 reading expected by economists.

"The failure of the service-sector PMIs to make further gains may lie in the fact that unemployment is beginning to pick up sharply in the euro zone," Matthew Sharratt, a European economist at Bank of America Merrill Lynch, said in a note.

As a result the overall composite PMI, which includes manufacturing, rose only slightly to a nine-month high of 44.4 in June from 44.0 in May. Another reading below the neutral 50.0 level indicated activity has fallen for 13 consecutive months, the longest period of contraction in the survey's 11-year history.

The composite PMI was weaker than the forecast of a rise to 45.5 from a Dow Jones Newswires poll of economists. The manufacturing PMI's rise to a nine-month high of 42.4 from May's 40.7 also fell short of expectations of an increase to 42.5.

Chris Williamson, chief economist at Markit, said the flash PMIs were
consistent with falls of 0.5% to 0.6% in euro-zone gross domestic product in the second quarter, but the June data suggested that the rate of improvement lost considerable momentum towards the end of the quarter.
"This is especially noticeable in services, where rising unemployment appears to have hit demand," he said.

In the first quarter, euro-zone GDP slumped a record 2.5% on the quarter and 4.8% on the year in what economists said would probably mark the low point of the ongoing recession. The PMI figures suggest the recovery is likely to be gradual at best.

"In fact, we expect the economy to be more or less flat for the next four quarters," Dominic Bryant, an economist at BNP Paribas, said in a note. "This is worse than the likely performance in the U.S. and U.K. and reflects the less aggressive action of policy makers in the euro zone in the areas of monetary policy, fiscal policy and banking-sector support."

The European Central Bank has lagged behind the U.S. Federal Reserve and the Bank of England in trying to tackle the recession, with the U.S. and U.K. policy makers cutting interest rates lower and moving faster to introduce unorthodox measures to pump cash into the economy.

The ECB has also been more skeptical about implementing fiscal boosts. On Monday ECB President Jean-Claude Trichet said further stimulus spending by European governments could undermine confidence and postpone the economic recovery.

Trichet has said the euro-zone economy should recover gradually next year. ECB staff project GDP will shrink 4.1% to 5.1% this year, and next year will see something between a decline of 1.0% and growth of 0.4%.

There were mixed signals Tuesday from Germany. Figures from the GfK market research institute showed German consumer confidence improved more than expected for July. But the flash PMI dropped for the first time in four months in June as a sharper contraction in services outweighed a smaller decline in manufacturing.

Also Tuesday, Essen-based RWI, one of Germany's foremost research institutes, revised its forecast for the country's GDP contraction this year to 6.4% from 4.3%, and cut its growth forecast for next year to 0.2% from 0.5%.

"Today's PMIs add to recent evidence that the worst may be behind us and that the euro-zone economy is stabilizing. However, there is no reason for overhasty enthusiasm," said Carsten Brzeski, an economist at ING. "A return to positive growth numbers, however, might have to wait until 2010."

Data from France were also mixed. Official figures showed business sentiment improved slightly in June, but consumer spending on manufactured goods - a good proxy for consumer spending - dropped 0.2% on the month and was 1.6% weaker on the year.

France's preliminary PMI report showed private-sector output posted its smallest monthly drop in a year in June. But like the euro-zone report, the benefit of a smaller decline in manufacturing activity was partially offset by a sharper-than-expected contraction in services.

Nevertheless, the euro-zone PMI report helped cement expectations that the worst of the recession has passed. In manufacturing, the ratio of new orders to inventory, a reliable gauge of future production trends, rose sharply to a 19-month high in June. Expectations of activity in the services sector one year from now also hit a 23-month high, Markit said.

"Today's correction in the services index is a useful reminder that the
euro-zone economy remains stuck in recession, though obviously the pace of GDP decline will ease significantly after the last horrible two quarters," Marco Valli, an economist at UniCredit Research, said in a note.