Eurozone economies weaken further

2012-06-05 10:19

London - All of the eurozone’s major economies are now in various states of decline, according to business surveys that suggested even Germany is no longer immune to the tremors emanating from the likes of Greece and Spain.

Tuesday’s purchasing managers' indexes (PMIs) showed the euro area’s vast private economy shrank in May at the fastest pace in nearly three years, with company order books collapsing.

Markit’s Eurozone Composite PMI, which surveys thousands of companies every month, fell to 46.0 in May from April’s 46.7, its lowest reading since June 2009 and spending its fourth month below the 50 mark that divides growth and contraction.

It was little changed from a preliminary reading.  

Of particular note was the suggestion Germany is no longer generating the sort of economic growth that kept the wider eurozone out of recession in the first quarter, with businesses seeing a mild downturn last month.

The PMIs have a good record of tracking economic growth and countered claims from European Central Bank (ECB) president Mario Draghi that he expects a recovery gradually over the course of the year.

“Based on these numbers, it would not be surprising to see GDP (gross domestic product) for the (eurozone) contract by 0.5% in the second quarter, though an even steeper decline could be seen if the June data disappoint,” said Chris Williamson, chief economist at survey compiler Markit.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield.”

Greece, which unleashed the financial maelstrom that has ravaged the bloc, is due for a crucial second election in three weeks that may determine whether it remains a member of the currency union.

With stock markets in decline and safe haven government bonds in the ascendant, fears about the eurozone economy prompted a sharp fall in new business orders.

The composite PMI’s new business index last month slumped to 44.6 from 44.8 in April, its lowest reading since June 2009.

While showing a mild contraction in German business activity, the surveys brought no good news from the eurozone’s more fragile nations.

“Italy seems to be faring the worst, with its PMI consistent with GDP falling by more than 1% in the second quarter,” said Williamson.

“However, declines could also exceed 0.5% in both France and Spain.”

The PMI for the services sector, which covers companies ranging from banks to restaurants, declined slightly to 46.7 in May from 46.9 in April - its lowest reading since October last year.

It was a marginal improvement on a preliminary reading of 46.5.

It showed prices charged to consumers declined for a sixth straight month, suggesting ECB policymakers may be able to worry less about the threat of high inflation.

Indeed, while most economists still think the ECB will hold interest rates for a long time, more than a third polled by Reuters last week were convinced it will soon cut interest rates below their present record low of 1.0% to help the economy.