Europe Services, Manufacturing Cool as Retail Sales Decline

Europe’s services and manufacturing industries grew at the slowest pace in seven months in September, adding to signs that the economy is weakening as governments from Spain to Ireland implement austerity measures.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 54.1 in September from 56.2, London-based Markit Economics said today. It had initially reported a drop to 53.8. A reading above 50 indicates expansion. Spanish services contracted the most since February and Irish activity shrank for the first time since March.

Europe’s recovery is weakening as governments accelerate efforts to tackle their budget deficits and fix their banks just as the global economy weakens. Spain in September announced the biggest cuts in three decades, and Ireland was last week forced to raise the cost of bailing out its financial system to 50 billion euros ($68 billion).

“Disposable incomes will be hit by a tightening and spreading fiscal squeeze,” said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “As exports slow further in the coming months, we see the overall euro-zone recovery faltering.”

European Central Bank President Jean-Claude Trichet said on Sept. 30 that he remains “cautious” about the economic outlook, while the weakness of growth today prompted the Bank of Japan to reduce borrowing costs for the first time since 2008.

Ireland, Spain

The euro-region’s services index fell to 54.1 in September from 55.9 in August, Markit said, the weakest since October. The manufacturing gauge declined to a six-month low of 53.7 from 55.1, it said on Oct. 1. A gauge measuring an expansion of new business in both industries was the weakest in almost a year, reflecting “slower growth of both domestic and external demand,” today’s report said.

The euro was little changed against the dollar after the report and was at $1.3767 as of 1:07 p.m. in London, up 0.6 percent from yesterday. The single currency has strengthened 10 percent against the dollar over the past three months, making exports less competitive.

A gauge of services in Ireland dropped to 48.8 from 52.9 in September, and Spain’s index fell to 47.9 from 49.2. Bank of Spain Governor Miguel Angel Fernandez Ordonez said the country’s economy showed a “clear weakening” in the third quarter.

Services still expanded in the bloc’s biggest economies. In Germany, Europe’s largest economy, the gauge fell to 54.9 from 57.2. France and Italy posted readings of 58.2 and 51.3, respectively.

Spending Cuts

As governments trim budgets with spending cuts and tax increases, consumers may remain reluctant to boost spending. A separate report today showed euro region retail sales fell 0.4 percent in August, the most since April. Economists had forecast a 0.2 percent gain, according to the median of 21 estimates in a Bloomberg News survey.

“The outlook for real household-income growth is not positive, linked to low employment and compensation growth, which is a restraint on spending,” said Ken Wattret, an economist at BNP Paribas in London.

Euro-area economic growth probably weakened to 0.5 percent in the third quarter from 1 percent in the second, the European Commission said on Sept. 13. The economy may grow 0.3 percent in the current quarter, it forecast. German investor confidence dropped to a 19-month low in September and European unemployment held at the highest in more than 12 years in August.

With the global recovery losing steam, companies may find it difficult to boost sales. U.S. manufacturing growth weakened in September, backing the Federal Reserve’s forecast for a “moderate” pace of economic expansion over the coming months.

Central Bank Action

The Bank of Japan today pledged to keep its benchmark interest rate at “virtually zero” until deflation has ended, with policy makers setting up a 5 trillion-yen ($60 billion) fund to buy government bonds and other assets.

The ECB will probably keep its benchmark interest rate at a record low of 1 percent when policy makers meet in Frankfurt on Oct. 7, according to a Bloomberg News survey. The bank last month extended unlimited liquidity support to banks into 2011, giving them more time to patch up their balance sheets.

In Europe, governments have stepped up fiscal tightening as they struggle to restore investor confidence after this year’s sovereign debt criiss. Moody’s Investors Service said today it may cut Ireland’s credit rating on the cost of bank bailouts. Portugal’s government last week announced additional austerity measures to push down the region’s fourth-largest shortfall after Ireland, Greece and Spain in 2009.

EU Monetary Affairs Commissioner Olli Rehn said on Sept. 30 in Brussels that the euro region is not “out of the woods.” Sergio Marchionne, chief executive officer of Italian carmaker Fiat SpA, said last week that September “was not a great month” in Europe.

“Most elements of the euro-zone survey weakened, pointing to further softness ahead,” said Howard Archer, chief European economist at IHS Global Insight in London. The economy “is facing serious economic headwinds as fiscal tightening is increasingly kicking in across the region.”

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.