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Euro woes deepen; China, US improve a bit

PMIs suggest euro zone decline deepening; economic rot taking root in Germany, France
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First Published: Wed, Oct 24 2012. 06 18 PM IST
The slump that began in Greece and spread to other smaller euro zone economies is now clearly gripping the core economies of the region. Photo: AFP
The slump that began in Greece and spread to other smaller euro zone economies is now clearly gripping the core economies of the region. Photo: AFP
Updated: Wed, Oct 24 2012. 11 32 PM IST
New York: Euro zone businesses suffered another dismal month in October, suggesting the economy may be headed for a deeper recession than expected, but conditions improved slightly for US and Chinese manufacturers.
In Europe, a slump that began with a debt crisis in Greece had spread across the 17-country euro zone as factory output in Germany, the region’s biggest economy and top exporter, plunged.
The malaise indicated the downturn could accelerate over the final months of the year, deepening a euro zone recession.
“It’s very disappointing. It’s a depressing scenario, as things are getting worse,” said Chris Williamson, chief economist at financial data firm Markit.
Markit’s Composite Purchasing Managers’ Index (PMI) for the euro zone, which polls some 5,000 businesses, fell to 45.8 this month, its lowest reading since June 2009. It has been below the 50 mark that separates growth from contraction since February.
Things were a bit brighter in North America and Asia.
A survey showed China, the world’s second largest economy, was recovering from its weakest period of growth in three years. While manufacturing contracted for a 12th straight month, output hit a three-year high and order books were their most robust since April.
The outlook was a bit more tempered in the United States. Its manufacturing sector managed to grow this month with Markit’s manufacturing PMI index edging up to 51.3, but weak overseas demand and uncertainty surrounding US elections and fiscal policy suggested its recent difficulties were not over.
“Europe is still struggling a lot and it’s the United States’ trading partner. There are some concerns about the fiscal cliff as well as the US Presidential election,” said Robert Van Batenburg, head of global research at Louis Capital Markets in New York. “There is some measure of hope out there, but I’m skeptical about what will happen between now and March.”
Though US growth has been sluggish in recent months and is not expected to be much above 2% for the year, the economy has been more resilient than that of Europe or Japan.
In part, that may be thanks to a modest recovery in housing. New single-family US home sales surged in September to their highest level in more than two years.
Corporate earnings have been mixed as well.
Strong results from Boeing Co and the hopeful Chinese factory data provided temporary relief to a slumping stock market. But worries about global growth have weighed on some firms.
Chemical companies DuPont and Dow Chemical Co both plan to lay off workers to counter slower global demand. Specialty glass manufacturer Corning Inc, also said it would cut jobs to offset slower sales.
Major central banks are already making maximum efforts to boost growth, and economists fear there is not much more that can be done. On Wednesday, European Central Bank (ECB) president Mario Draghi defended a bond-buying program aimed at easing pressure on indebted countries while the US Federal Reserve was expected to reiterate its commitment to keep buying bonds and holding interest rates at zero.
Germany struggles
The euro zone economy contracted 0.2% in the second quarter and is predicted to have shrunk 0.3% in the third, meeting the technical definition of recession.
“We are more downbeat than the official data. The PMIs are running at levels in the third quarter and start of the fourth quarter historically consistent with GDP falling at about 0.6%,” he said.
A recent Reuters poll predicted the euro zone economy may not recover until 2014.
Plunges in German and French manufacturing “reinforce concern that the economic downturn in the region may be deepening and widening,” said Martin van Vliet, senior economist at ING.
In a separate report, Germany’s Ifo institute showed business sentiment in the country dropped sharply to its lowest in more than 2-1/2 years, the sixth consecutive monthly fall.
Bad news has been flowing out of Europe’s company boardrooms too.
Carmaker Volkswagen reported a fall in nine-month operating profit on Wednesday and sportswear maker Puma reported sales in the region dropped in the third quarter.
Markit’s measure of services business expectations sank to its lowest reading since February 2009, at the nadir of the last recession and when world stock markets were tumbling.
Stabilization in China
It was a different story for China, where the HSBC Flash Manufacturing PMI rose to a three-month high of 49.1 in October.
“(This) adds to recent signs of stabilization of the Chinese economy, thus underpinning our view that the slowdown in activity is bottoming out,” said Nikolaus Keis at UniCredit.
A Reuters poll taken after last week’s GDP data showed economists anticipating a modest rebound in growth in the fourth quarter to 7.7% from the third-quarter’s below-target 7.4%.
Even that figure would not be enough to lift full year expansion from an expected 13-year low, however. Reuters
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First Published: Wed, Oct 24 2012. 06 18 PM IST
More Topics: Euro Zone | Economy | PMI | Growth | China |