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Euro-Area June Manufacturing, Services Shrink

July 04, 2012

Euro-Area Manufacturing, Services Output Shrinks for Fifth Month

Employees work on the assembly of Volkswagen AG Sharon automobiles on the production line at the company's Autoeuropa factory in Palmela. Photographer: Mario Proenca/Bloomberg

Services and manufacturing output shrank in June for a fifth month in the euro area and services unexpectedly contracted in Germany, adding to signs of a deepening economic slump in the second quarter.

A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area rose to 46.4 from May, London-based Markit Economics said today. That’s above an initial estimate of 46 published on June 21. In Germany, a gauge of service industries dropped to 49.9, below an estimate of 50.3. A reading below 50 indicates contraction.

Europe’s economy probably contracted in the second quarter as budget cuts eroded consumer demand and prompted companies to eliminate jobs. In China, services industries expanded in June at the slowest pace in 10 months, a report showed today. The European Central Bank tomorrow may lower borrowing costs to a record, according to a Bloomberg survey, after worsening turmoil forced Spain and Cyprus last month to seek external aid.

“This is another very weak report,” said Howard Archer, chief European economist at IHS Global Insight in London. “It appears that the euro zone suffered renewed and appreciable gross domestic product contraction in the second quarter.”

The euro traded at $1.2580 at 10:32 a.m. in Frankfurt, down 0.2 percent on the day. The Stoxx Europe 600 Index decreased 0.5 percent, with Germany’s DAX benchmark down 0.6 percent.

Budget Gaps

The euro has declined 3.9 percent over the past two months as the worsening debt turmoil forced Spain to seek external aid of as much as 100 billion euros ($126 billion) for its banking system. Cyprus last week became the fifth euro-area nation to ask for a bailout after Ireland, Greece, Portugal and Spain.

Governments across the region are struggling to plug their budget gaps and restore investor confidence as the economic slump deepens. At least seven euro economies are already in recession and Germany, Europe’s largest, which helped the single-currency zone avert a contraction in the first quarter, is also cooling.

German investor confidence dropped the most in 14 years in June and executives also grew more pessimistic. Euro-area economic sentiment slumped to the lowest in more than 2 1/2 years last month and unemployment surged to a record of 11.1 percent in May from 11 percent in the previous month.

‘Huge Drop’

“Job losses are mounting as a result of falling demand, as companies seek to reduce costs and prepare for the possibility that worse is to come,” Chris Williamson, chief economist at Markit, said in a statement. “Service-sector companies’ expectations for the year ahead showed one of the largest declines in the history of the survey, pointing to a huge drop in confidence due to the worsening political and economic crises.”

Economists at Commerzbank AG in Frankfurt estimate that the euro-region economy probably contracted 0.25 percent in the second quarter from the previous three months, when it stalled.

“The relentless decline in the sentiment indicators suggest that the euro zone’s recession will persist over the summer,” economists including Christoph Weil wrote in a note on June 28. “Whether the worst will be over by the autumn depends on the further course of the sovereign debt crisis.”

‘More Difficult’

Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers, said on June 29 that leaders “didn’t close any doors” on short-term measures to calm markets. He said they will be discussed in the coming weeks and euro-region finance chiefs should reach final agreement on July 9.

Martin Winterkorn, chief executive officer of Germany’s Volkswagen AG (VOW), said on June 25 that “the second half of 2012 is certain to become more difficult and challenging” for the industry. Commerzbank CEO Martin Blessing said last week that a “swift end to the euro crisis is not in sight.”

European exporters may struggle to maintain their sales growth as economies around the world are showing signs of slowdown. China’s purchasing managers’ index released today by HSBC Holdings Plc and Markit fell to 52.3 in June from a 19- month high of 54.7 in May. That’s the largest drop since August. China’s official manufacturing PMI in June was 50.2, signaling a slower expansion for a second month.

ECB Cut

In the U.S., manufacturing unexpectedly contracted in June for the first time since the world’s largest economy emerged from recession three years ago. Federal Reserve policy makers have said they’re ready to take more steps should the U.S. expansion slacken.

The ECB last month lowered its euro-area growth forecast for 2013 to 1 percent from 1.1 percent and said the economy may shrink 0.1 percent in 2012. President Mario Draghi said on that day that “a few” council members had opted to lower the benchmark interest rate from 1 percent.

Fifty-one out of 62 economists in a Bloomberg survey forecast the central bank to cut the benchmark interest rate tomorrow, with the rest predicting an unchanged rate. The ECB has held interest rates on hold since cutting them twice in the fourth quarter of 2011 to bolster the economy.

“They will likely cut rates probably by 25 basis points. I think that there’s a real need here to provide an element of stimulus and if they stay on hold, I think the market may get a little bit nervous,” John Stoltzfus, chief market strategist at Oppenheimer & Co. Inc. told Ken Prewitt on Bloomberg Radio’s “Bloomberg Surveillance” yesterday. “The recession for Europe is something they’re already experiencing.”

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


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