Euro-Area Output Contracts

Purchasing managers index signals recession in eurozone.

Euro-area services and manufacturing output contracted more than initially estimated in August, adding to signs the economy has slipped into a recession.

A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area fell to 46.3 from 46.5 in July, London-based Markit Economics said today. That’s below an initial estimate of 46.6 published on Aug. 23. A reading below 50 indicates contraction.

Europe’s economy probably entered its first recession in three years in the second quarter as governments stepped up spending cuts to plug budget gaps, undermining consumer and export demand. Euro-area economic confidence dropped more than economists forecast in August and German unemployment increased, adding to signs of a deepening slump as the European Central Bank prepares for its monthly meeting tomorrow.

Indicators suggest that “the euro zone is headed for further gross domestic product contraction in the third quarter,” said Howard Archer, chief European economist at IHS Global Insight in London. “Ongoing serious euro-zone sovereign debt problems are magnifying the problems by weighing down on already weak and fragile business and consumer confidence and adding to uncertainty about the outlook.”

The euro traded at $1.2523 10:05 a.m. in Brussels, down 0.3 percent on the day. It has gained 1.1 percent against the dollar over the past three months, paring annual losses to 3.1 percent.

An indicator of services output slipped to 47.2 from 47.9, today’s report showed. A gauge of euro-area manufacturing rose to 45.1 from 44 in July.

Investors are looking for ECB President Mario Draghi to unveil details of a bond-purchase program at tomorrow’s meeting to help counter the region’s fiscal crisis. The Frankfurt-based central bank has said it’s ready to help distressed nations as long as they request aid from Europe’s bailout facility first.

Italy’s Prime Minister Mario Monti told Il Sole 24 Ore in an interview published on Aug. 29 that the government’s austerity measures are starting to offset market concerns and that the country doesn’t need to tap the rescue funds at the moment. Spain, with the region’s third-largest deficit, also hasn’t asked for support beyond the 100 billion euros ($125 billion) pledged for its banks.

 

‘High Expectations’

Stefan Keitel, global chief investment officer at Credit Suisse Asset Management Ltd., told Maryam Nemazee on Bloomberg Television’s “The Pulse” on Sept. 3 that “it’s only a matter of time” before the ECB starts buying Spanish government debt.

“With regards to the ECB meeting, expectations are pretty high,” Keitel said in the interview from Frankfurt. Draghi “will again phrase that he will do everything he can do keep the situation under control, that the euro is irreversible, and he also made a very clear statement that if it’s necessary, he will be able to buy Spanish and Italian bonds. So far he had not been successful with conventional monetary policy to get the situation in the periphery under control.”

Governments may find it more difficult to raise additional revenues with at least five euro nations already in recession and the crisis spreading from the periphery to core countries. In Germany, Europe’s largest economy, business confidence fell for a fourth straight month in August and investors also grew more pessimistic.

Euro-area retail sales probably fell 0.2 percent in July from the previous month, when they advanced 0.2 percent, a Bloomberg survey shows. The European Union’s statistics office in Luxembourg will release the report at 11 a.m. today.

Siemens AG, Europe’s largest engineering company, on Aug. 27 intensified a push to lower costs and announced 500 job cuts at the business making mechanical drives. Chief Executive Officer Peter Loescher has cut his profit target once this year and said in July that the lower goal will also be a stretch as demand dwindles from China and Europe grapples with the crisis.

The ECB will publish its latest economic projections tomorrow. The central bank in June forecast the economy to shrink 0.1 percent this year, before expanding 1 percent in 2013. ECB council member Ewald Nowotny has said that it’s likely that policy makers will lower the economic estimates.

IHS Global Insight’s Archer said he expects the ECB to lower borrowing costs by 25 basis points to 0.5 percent by October.

“A move is very possible as soon as its September meeting,” he said. “Even more important though will be the ECB fleshing out its bond-buying strategy in a way that satisfies the markets.”


 

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