Monday, December 5, 2011

GLOBAL ECONOMY-Euro zone and China herald global slowdown

LONDON (Dec 5): Europe's debt crisis might have pushed its economy into a far steeper contraction than anyone thought and growth in China is sputtering, according to surveys that point to a sharp global slowdown taking place.

Even though there are fresh signs the U.S. economy is perking up, business surveys on Monday were mainly downbeat and confirmed the economic toll of the euro zone's sovereign debt crisis.

They come at the start of a week that could prove crucial in resolving a debt crisis which threatens to tear apart Europe's common currency area -- something that would have catastrophic implications for the global economy.

The euro zone's composite purchasing managers index (PMI), while improving slightly month-on-month in November, still tallied with a 0.6 percent quarterly rate of decline for the last three months of this year.

That would be worse than any forecast from more than 30 economists in a Reuters poll last month, which projected a mere 0.1 percent decline for the fourth quarter.

In essence, it was a case of the pace of decline slowing a bit.

"Globally if you take the PMIs together, there is great concern. The upward movement in the euro zone composite PMI is just a minor blip in clearly contractionary territory," said Philip Shaw, chief economist at Investec in London.

"The Chinese situation needs to be watched as well to see if this is just a blip or part of a trend. The saving grace I guess has been the U.S. ... where there does seem to evidence that it is moving out of its soft patch."

There was a rare piece of good news from Britain, where its services PMI unexpectedly rose last month, suggesting the UK may avoid recession, although perhaps not stagnation.

While recession in the euro zone now looks a foregone conclusion, there are worrying signs the Chinese economy is starting to sag -- perhaps unsurprising given the European Union is China's biggest export partner.

Chinese service sector growth cooled in November to its weakest pace in three months, further backing a view that authorities will have fine-tune their monetary policy again.

German Chancellor Angela Merkel meets French President Nicolas Sarkozy on Monday to outline joint proposals for EU treaty changes that would involve tough sanctions for fiscally wasteful members.

Then on Friday there is a wider EU summit that some see as make-or-break for the euro zone after a string of half-measures that have failed to stop bond market contagion spreading from Greece to Ireland, Portugal and now Italy and Spain.

World stocks rose on Monday as confidence grew that European leaders would make big strides in solving the debt crisis.

But a Reuters poll of leading global economists last month suggested the euro zone will not survive intact in its current form, unless Europe's leaders are will to take action on a scale not seen in the last few years.


Markit's Eurozone Composite PMI, which measures changes in business activity across the euro zone, rose slightly to 47.0 in November from October's 46.5, albeit still far below the 50 mark that divides growth from contraction.

"The major euro zone countries are all now contracting and face the risk of recession," said Chris Williamson, chief economist at survey compiler Markit.

The latest Reuters poll of economists showed a 60 percent chance the euro zone would fall into recession.

"Italy is faring the worst, with the survey suggesting that GDP could collapse by 1 percent in the fourth quarter, while both France and Spain are likely to see their economies contract by around 0.5 percent."

Britain's services PMI was an unexpected bright spot, rising to 52.1 in November from 51.3 in October. Survey compiler Markit said it meant the UK economy looks unlikely to grow much, taking into account some dire manufacturing data last week.

Analysts expect the European Central Bank will cut interest rates on Thursday and throw more funding lifelines to stressed banks.

Further central bank policy easing also looks likely in China, where HSBC's services PMI fell to 52.5, a sharp decline given that October's reading was 54.1 -- the highest in four months.

"With price pressures easing further, Beijing can and should use policies that are targeted on small businesses and service sectors to keep GDP growth at above 8 percent for the coming year," Qu Hongbin, HSBC's chief China economist, said in a statement.

Economists expect the U.S. ISM non-manufacturing index, comparable to the European and Chinese PMIs and due at 1500 GMT, to show a rise to 53.5 in November from 52.9, which would be further evidence of improving fortunes for the American economy.

"However, if the rest of the world continues to perform as badly as November's indicators have suggested, then the U.S. renaissance could prove to be temporary," said Investec's Shaw. - Reuters

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