Wednesday, June 23, 2010

Euro zone services growth calms as demand doubts grow

LONDON: The sprightly expansion achieved by euro zone services and manufacturing companies since spring slowed slightly in June, according to a survey that cast growing doubt on the strength of domestic demand.

Markit's Eurozone Flash Services Purchasing Managers' Index, based on surveys of around 2,000 firms ranging from hotels to banks, fell to 55.4 in June from 56.2 in May ' its first decline since February and below forecasts for 55.9.

While the PMI is still firmly above the 50 mark dividing growth from contraction, persistent worry about the fiscal health of euro zone states and signs of dimming consumer demand in keystone economy Germany may yet undermine a private sector recovery.

Survey compiler Markit said the data show the 16-nation euro zone economy may have grown faster in the second quarter at around 0.6% to 0.7%, compared to 0.2% in the first.

"However, the downturns in growth of output, new orders and exports towards the end of the quarter suggest that economic growth will moderate as we move into the second half of the year," said Chris Williamson, chief economist at Markit.

The services new business index showed slowing domestic demand for the second month running in June, falling to 52.7 from 54.2 last month.

And the pace of new orders growth among euro zone manufacturers slipped for the third month in a row in June, with the sub-index measuring this dipping to 55.8 from 56.5 last month.

While the output sub-index rose to 57.3 from 56.8, the overall headline index for manufacturing edged down to 55.6 from 55.8 in May.

"It's partly a reflection of an extremly strong April, and we didn't expect that rate of growth to continue for long," said Markit's Williamson. "Nevertheless, there are signs of weakening."

The composite PMI index, which combines the services and manufacturing surveys and is often used to predict overall growth, dipped to 56.0 in June from 56.4 last month.

However, the employment index showed modest jobs growth for the second month after a 22-month stretch of layoffs, with the index rising to 50.6 from 50.5 in May.

Economists polled by Reuters last week said the euro zone's recovery from its worst ever recession shows scant sign of gaining momentum over the next 18 months, with a one-in-four chance of slipping back into recession.

Export dependence
Williamson picked out weak domestic demand in Germany as a cause for concern, as the services new business index there fell to 50.5 in June ' only marginally above the growth/contraction divide.

Speaking before a G20 Summit earlier this month, US Treasury Secretary Timothy Geithner said "European surplus countries" ' which many took to mean Germany ' had to boost domestic demand, which would lessen their reliance on cheap exports to sustain recovery.

Instead policymakers agreed to start cutting budgets, representing a marked shift from April when they advocated more time to allow unprecedented growth-boosting spending to do its work.

"At this stage in the recovery, we'd want to see consumer confidence lifting with greater spending on goods and services in the euro area," said Markit's Williamson.

"That doesn't seem to be happening sufficiently at the moment, so we're looking at growth weakening in the second half of this year, probably."

The French services and manufacturing PMIs dipped slightly too in June, although the surveys still show strong private sector expansion there and continued outperformance of its euro zone stablemates. ' Reuters

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