Eurozone risks return to contraction

London - The eurozone economy may face another contraction after business activity grew less than expected in November, although more upbeat data in Asia and the United States suggested global growth should remain intact in the final quarter.

Firms across the eurozone cut prices again, which may be a topic of concern for the European Central Bank at a policy meeting on Thursday.

However, China's services sector picked up some pace in November and JPMorgan's Global All-Industry Output Index, produced with Markit, held above the 50 mark dividing growth from contraction.

"November saw global economic growth continue its gradual slowdown from the highs of the middle of the year," said David Hensley, a director at JPMorgan.

"The survey therefore implies that global GDP will expand at a solid pace over the final quarter as a whole, albeit cooler than during the summer months."

But in the eurozone, Markit's final November Composite Purchasing Managers' Index (PMI), based on surveys of thousands of companies and seen as a good indicator of growth, sank to 51.1 from October's 52.1.

November was the 17th month the index has been above the 50 level, but the new business index fell below that mark for the first time since the middle of last year, suggesting a further downturn in December.

"The region is on course to see a mere 0.1% gdp growth in the final quarter of the year, with a strong likelihood of the near-stagnation turning to renewed contraction in the new year unless demand shows signs of reviving," said Chris Williamson, Markit's chief economist.

A Reuters poll last month for the eurozone predicted 0.2% economic growth this quarter and 0.3% next.
The Markit PMI covering the eurozone's dominant service industry fell to 51.1 from October's 52.3 and showed firms have been cutting prices for three full years now to drum up business.

The ECB is offering banks long-term cheap loans and buying covered bonds and asset-backed securities. But facing resistance from Germany, there is only an even chance it will buy government bonds.

"There are clear downside risks to various areas of the world economy including the eurozone and to some extent China," said Philip Shaw, chief economist at Investec. "The eurozone numbers do indicate the economy is moving forwards but at a snail's pace, (and) the pressure remains on the ECB."

Conversely, the Bank of England is expected to begin tightening policy next year, and after a survey showed its services sector expanded more than expected last month, recently revised forecasts for a later hike may be brought back in.

Fragile China

China's official non-manufacturing PMI rose to 53.9 in November from 53.8 while a separate services PMI published by HSBC/Markit inched up to 53.0 last month from October's 52.9, as new orders rose at their quickest pace in 2-1/2 years.

But, following Monday's news of a slowdown in manufacturing, the surveys painted a mixed picture of the labour market, with some economists predicting China would cut interest rates again in coming months after doing so unexpectedly on November 21.

"Things have gotten worse rather than better," said Louis Kuijs, an economist at RBS in Hong Kong, adding that any bottoming out in China's sagging housing market is unlikely to lead to a solid rebound next year.

"I predict one more rate cut to lower lending rates to 5.25% in the first quarter," he said.

In other data from the region, activity in India's services industry expanded at its fastest rate in five months, although the outlook was clouded by tumbling confidence.

US picture mixed

In the United States, the monthly pace of growth in the US services sector slowed in November to its lowest level since April, according to data from Markit on Wednesday.

The final November services sector PMI slipped to 56.2 in November from 57.1 in October.

"The slowing is still only modest, and leaves the economy growing at its approximate long-term trend rate," Markit chief economist Chris Williamson said.

Markit's final November US composite PMI, a weighted average of its manufacturing and services indexes, dipped to 56.1 last month from 57.2 in October. It matched the preliminary estimate.

An alternative gauge of growth in the US services sector from the US Institute of Supply Management (ISM) rose to 59.3 last month, just below the post-recession high of 59.6 hit in August, from 57.1 in October.

The November figure came above economists' forecasts for a reading of 57.5.