BLBG:Euro-Area Services, Manufacturing Contract For Seventh Month
Euro-area services and manufacturing output contracted for a seventh straight month in August, adding to signs of a deepening economic slump as European leaders struggle to contain the fiscal crisis.
A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area rose to 46.6 from 46.5 in July, London-based Markit Economics said today in an initial estimate. A reading below 50 indicates contraction. Economists had forecast an unchanged reading, the median of 19 estimates in a Bloomberg News survey showed.
Europe’s economy may struggle to return to growth as budget cuts from Spain to Ireland undermine consumer demand while companies eliminate jobs to protect earnings. With the fiscal crisis clouding the economic outlook and eroding investor confidence, French President Francois Hollande and German Chancellor Angela Merkel will meet in Berlin today.
“Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating and further signs that its export engine has slammed into reverse gear,” said Rob Dobson, an economist at Markit. “France may be edging closer to stabilization, while conditions outside the big two remain weak overall.”
Elusive Agreement
The euro pared gains after the report, trading at $1.2544 at 10:28 a.m. in Brussels, up 0.1 percent on the day. It has gained 3.6 percent against the dollar over the past month.
A gauge of euro-area manufacturing rose to 45.3 from 44 in July, today’s report showed. An indicator of services output slipped to 47.5 from 47.9, Markit said. In Germany, a manufacturing gauge rose to 45.1 from 43, while the service indicator slipped to 48.3 from 50.3. France’s manufacturing and services indicators both showed an improvement from July.
European leaders are returning from vacation with agreement still elusive on measures to support Greece and prevent Spain and Italy being shut out of sovereign debt markets. Greek Prime Minister Antonis Samaras, who requested a two-year extension of the nation’s fiscal adjustment program, will travel to Berlin tomorrow before heading to Paris.
The sovereign-debt crisis mustn’t become a “bottomless pit” for Germany, even though Europe’s biggest economy would pay the highest price in a breakup of the single-currency bloc, German Finance Minister Wolfgang Schaeuble said on Aug. 18. “There are limits,” he said, ruling out another Greek aid program.
Business Confidence
With investors growing more concerned about a euro breakup, the economy may enter a recession in the current quarter after contracting 0.2 percent in the previous three months. In Germany, Europe’s largest economy, business confidence fell more than economists forecast in July to the lowest in more than two years. Euro-area consumer confidence probably dropped for a third month in August, a Bloomberg survey shows ahead of a European Commission report at 4 p.m. in Brussels.
Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, on Aug. 1 reported its first drop in quarterly operating profit in almost three years and said the fiscal crisis could cause “the global economic climate to cloud over further.” Hochtief AG (HOT), Germany’s biggest builder, said on Aug. 14 that full-year profit targets have become more challenging.
Record Unemployment
Euro-area unemployment held at 11.2 percent in June, a record high, with companies from Belgium to Ireland and Italy cutting jobs to weather the slump. At least six euro member states are in recession, with Greece projected to shrink for a fifth straight year in 2012.
In the U.S., the Federal Open Market Committee said on Aug. 1 it will pump fresh stimulus if necessary into the weakening economic expansion to boost growth and lower unemployment. The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE, seeking to cap borrowing costs.
Bank of England Governor Mervyn King said on Aug. 8 that asset purchases remain the central bank’s main stimulus instrument. The U.K. central bank earlier this month maintained its bond-buying program at 375 billion pounds ($596 billion).
The European Central Bank, which in July cut borrowing costs to a record low of 0.75 percent, said on Aug. 2 that it’s ready to purchase government bonds in tandem with Europe’s rescue funds to fight the turmoil. While Germany’s Der Spiegel reported the central bank’s new program may set yield caps, the ECB responded by saying it’s “misleading to report on decisions which have not yet been taken.”
‘Significant Stability Risks’
Germany’s Bundesbank in its monthly report on Aug. 20 stepped up its criticism of the ECB plan, saying any government bond purchases would “entail significant stability risks.”
“For far too long, the ECB has been unable and unwilling to demonstrate that it will stand behind the single currency through thick and thin,” said Michael Derks, chief strategist at FXPro Group Ltd. in London. “If the ECB does decide to go it alone on this, itself a tall order, it will need to show enormous willing and firepower, or else the market will shred their credibility again very quickly.”
The Frankfurt-based central bank will hold its next policy meeting on Sept. 6 and also publish latest economic projections. In June, it had forecast the euro-area economy to shrink 0.1 percent in 2012 before expanding 1 percent in 2013.
‘Removing the Distortion’
Kit Juckes, head of foreign-exchange research at Societe Generale SA in London, told Ken Prewitt and Kathleen Hays on Bloomberg Radio’s “Bloomberg Surveillance” on Aug. 20 that if the ECB was able to follow the Fed and engage in “full-scale” QE, they could “at least calm the bond markets down.”
“The ECB has to take the decision at some point that it is going to intervene in bond markets and everything else is secondary,” Andrew Milligan, head of global strategy at Standard Life Investments Ltd. in Edinburgh told Erik Schatzker on Bloomberg Television’s “Surveillance” on Aug. 20. “All it is doing, is removing the distortion from a couple of bond markets in Europe. On its own, it’s not going to bring the European recession to an end.”
To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
