Euro-Area Services, Manufacturing Slump

Weak readings on purchasing indexes suggests euro area contraction continues in Q3.

Euro-area services and manufacturing output fell to a 39-month low in September as European leaders struggled to reverse the single-currency bloc’s slide into recession.

A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area dropped to 45.9 from 46.3 in August, London-based Markit Economics said today in an initial estimate. A reading below 50 indicates contraction. Economists had forecast a reading of 46.6, the median of 23 estimates in a Bloomberg News survey showed.

The euro area’s economy is heading for a second straight quarterly contraction after a 0.2 percent decline in the three months through June as fallout from the fiscal crisis damps consumer spending and corporate investment. European Central Bank President Mario Draghi this month unveiled details of an unlimited bond-purchase program to regain control of interest rates and fight speculation of a currency breakup.

Today’s “dismal” report indicates the euro area will suffer “further and appreciable GDP contraction” in the third quarter, “which will put it in recession in every sense of the word,” Howard Archer, chief European economist at IHS Global Insight in London, said in an e-mailed note. “Sharply falling incoming new business and employment in September do not bode well for euro-zone economic activity in the fourth quarter.”

Archer said IHS forecast a third-quarter contraction of as much as 0.4 percent. The median estimate in a Bloomberg News survey of 21 economists is for a 0.2 percent decline followed by stagnation in the fourth quarter.

An indicator of euro-area services output dropped to 46 in September, a 38-month low, while the manufacturing gauge rose to 46, a 14th straight monthly contraction, Markit said. In Germany, Europe’s largest economy, the manufacturing index improved to 47.3 from 44.7, and French production plummeted to 42.6, a 41-month low.

The prolonged gloom for manufacturers extended to Asia, where a Chinese survey pointed to an 11th month of contraction in September and Japan’s exports fell in August, supporting the case for increased stimulus as Asia’s growth slows.

The preliminary reading was 47.8 for a China purchasing managers’ index released today by Markit and HSBC Holdings Plc, compared with a final level of 47.6 last month. Japan’s overseas shipments slid 5.8 percent on weak demand from Europe and China.


ECB Rate Cut

In the U.S., manufacturing output growth probably slowed in September, the median of 13 economists’ estimates in a Bloomberg Survey showed. Markit will release the report at 2 p.m. today in London.

Archer said today’s euro-area reports “heighten belief that the ECB will be cutting interest rates from 0.75 percent to a new record low of 0.50 percent sooner rather than later, with a move looking ever more likely in October.”

The Frankfurt-based central bank holds its next policy meeting on Oct. 4.

“We had hoped that the news regarding the ECB’s intervention to alleviate the debt crisis would have lifted business confidence, but instead sentiment appears to have taken a turn for the worse, with businesses the most gloomy since early-2009 due to ongoing headwinds from slower global growth,” Markit’s chief economist, Chris Williamson, said in the report.

“This gloom is clearly reflected in headcounts falling at the fastest rate since January 2010 as companies seek to adjust to weaker demand,” he said.

The euro-area’s unemployment rate is at a record 11.3 percent, with companies from France to Belgium cutting jobs to weather the region’s turmoil.

Carrefour SA on Aug. 30 said it plans to cut as many as 600 administrative jobs in France as part of a three-year plan formulated by Chief Executive Officer Georges Plassat to turn around the world’s second largest retailer.


Bloomberg News


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