Euro zone slump moderates, German worries appear

Updated: Tuesday, 23 Apr 2013 09:09

A sharp drop in German business activity overshadowed an easing downturn in France in April, surveys showed today, raising concerns over a further economic contraction in the euro zone.

Markit's flash euro zone services PMI, an early gauge of business activity each month, rose to 46.6 in April from 46.4 in March.

The reading was below the 50 line that divides growth from contraction but matched forecasts.

Survey compiler Markit cautioned against taking the rise as a clear sign the region's recession has bottomed out, pointing to a surprise decline in German companies that form the backbone of the euro zone economy.

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"Previously, we've seen Germany expand while other countries have contracted - notably Spain, Italy and France," said Chris Williamson, chief economist at Markit.

"Now it seems those contractions are being accompanied by a downturn in the largest economy, Germany, and that will no doubt act as a drag on growth," he added.

There was some respite for French companies, which in March endured their worst month since the depths of the deep recession in 2009, and that helped the to support the latest wider euro zone PMI.

Williamson said officials at the European Central Bank, which meets next week to decide monetary policy, may be relieved to see the euro zone PMIs at least did not signal a further deterioration this month. However, that could change.

"The forward-looking indicators suggest there's risks to the downside for the contraction to gather pace," said Williamson.

The euro zone economy shrank 0.6% quarter on quarter in the last three months of 2012. Comments by European Central Bank policymakers yesterday stressing falling inflation and poor growth prospects in the euro zone suggest the ECB may be leaning towards a further cut in its main interest rate.

Most economists polled by Reuters earlier this month did not think the European Central Bank would cut its main rate from 0.75%, already a record low, although the poor German PMI readings may alter that view.

Confidence in services companies about the coming year slipped to the lowest level this year, with the business expectations index slipping to 55.7 from 56.2 in March. Consumer morale in the euro zone improved in April, the European Commission said earlier this week, but remained well below the currency area's long-term average.

Euro zone factories suffered another grueling month in April, with the manufacturing PMI falling to 46.5 from 46.8, its worst showing this year.

There seems little prospect of much improvement next month, with the new orders index dropping to its lowest since December, at 44.9 from 45.3.

The composite euro zone PMI, which groups both the services and manufacturing surveys together, held at 46.5 in April. Disappointingly, it showed euro zone companies cut jobs at a faster rate this month, after the March survey showed firms laid off staff at a slower pace.

"The overriding evidence we're getting on the future outlook perspective is that the debt crisis is really acting as a dampener on business and consumer confidence," said Markit's Williamson.

"There's a lack of clarity about the outlook. As long as that persists, we think there's going to be a big drag on growth, and the downturn is going to persist,'' he added.

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