Euro zone economy heads towards stabilization

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Euro zone economy heads towards stabilization

News Article Date: Monday 27th of July 2009

The euro zone's services and manufacturing sectors contracted much less sharply than expected in July but firms continued to slash jobs in a bid to reduce costs, key surveys showed on Friday. Markit's Eurozone Flash Services Purchasing Managers Index (PMI) of around 2,000 companies climbed to 45.6 in July from 44.7 in June, its highest level since last October. While this marks the 14th month it has been below the 50.0 mark that divides growth from contraction it was considerably ahead of economists' forecasts for 45.1. The 16-nation bloc's manufacturing PMI also confounded economists' expectations for 43.5, climbing to an 11-month high of 46.0 from 42.6 in June. "At this pace of increase, it would only take another two months before the composite PMI indicated an expansion in euro area activity," said Collin Ellis at Daiwa SMBC. There was some divergence in the bloc's two biggest economies as service sector activity in Germany contracted at its slowest pace since September and its manufacturing PMI staged its biggest ever one month increase to 45.2 from 40.9. Ifo's closely-watched German business climate index, also released on Friday, rose to 87.3 in July, higher than the Reuters consensus for a smaller rise to 86.5. The euro hit a fresh session high against the dollar, while European stocks turned positive after the better than expected surveys. However, data from France was less rosy, with its service sector PMI dropping to 45.5 from June's 47.2 but the country's manufacturing PMI rose to 47.9 from 45.9 last month. In an effort to revitalize the struggling economy the European Central Bank has slashed interest rates to just 1.0 percent and plans to buy up to 60 billion euros of covered bonds. The euro zone economy contracted 2.5 percent in the first quarter and is expected to have shrunk 0.6 percent in the second but economists see it flat in the current quarter and growing by just 0.1 percent in the final three months of the year. "At this kind of level the PMI is consistent with flat GDP, so if we continue to see these kind of monthly rises we ought to have positive GDP in the third quarter," said Mark Wall at Deutsche Bank. EMPLOYMENT FALLS Firms are still slashing jobs at a rapid pace in a bid to cut costs and remain afloat but the services employment index inched up to a 6-month high of 44.9 from June's 44.5. Unemployment in the euro zone reached a 10-year high of 9.5 percent in May and is seen averaging 9.6 percent this year before climbing higher to 11.2 percent in 2010. However, the new export orders index for the manufacturing sector rose to its highest level since last June of 48.3 from last month's 43.7, indicating that despite a stronger euro countries are creeping out of a global recession and ordering goods. And the orders to inventories ratio, a key gauge of pressure on companies to raise production, jumped to a level not seen since January 2007, indicating factories are running down old stocks at a rapid rate. The combined rises in the services and manufacturing indexes took the Composite Index to a 10-month high of 46.8, above June's 44.6 and expectations for 45.3. The composite output price index rose to a 6-month high of 41.6 in July from 41.2 in June, so while remaining firmly in contractionary territory it suggests firms were having to discount less to shift goods and services. "Output prices are still very low, companies are desperately cutting prices in order to gain work," said Luigi Speranza at BNP Paribas. Inflation in the euro zone in June was at -0.1 percent but economists see its dip into negative territory as temporary and forecast it to rise in the later part of the year.
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