Euro-Area Services, Manufacturing Grow at Slowest Pace in Almost Two Years

European services and manufacturing growth held steady in August at the slowest pace in almost two years, adding to signs the euro-region recovery is losing momentum as the sovereign debt crisis persists.

A composite index based on a survey of euro-area purchasing managers in both industries held at 51.1, the same as July’s reading and the lowest since September 2009, London-based Markit Economics said today. Economists forecast a drop to 50, the median of 15 estimates in a Bloomberg News survey showed. A reading above 50 indicates growth.

“It’s some light amidst all the gloom, but we are not out of the woods yet,” said Martin van Vliet, senior economist at ING Bank Group in Amsterdam. “It reduces the fear of an imminent recession, but growth will flat-line for the rest of the year.”

Europe’s economy is struggling to gather strength as governments from Italy to Spain step up budget cuts to fight the debt crisis. Pledges of 365 billion euros ($525 billion) in official loans to Greece, Portugal and Ireland, and 110.5 billion euros of bond purchases by the European Central Bank failed to fix the finances of those countries or prevent speculative attacks on Spain and Italy.

German Growth

Euro-area gross domestic product expanded 0.2 percent in the second quarter after a 0.8 percent gain in the previous period. That’s the worst performance since the euro region emerged from a recession in late 2009. In Germany, Europe’s largest economy, growth almost stalled in the period.

The euro extended gains after the data were released, gaining as much as 0.9 percent against the dollar. The single currency traded at $1.4477 at 11:17 a.m. in Brussels.

“The euro zone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years,” Chris Williamson, Markit’s chief economist, said in today’s report.

“A number of factors have hit growth, including a downturn in global demand, which caused exports of goods to fall at the fastest rate for over two years, and growing concerns about the economic outlook and the euro area’s financial crisis, which caused business confidence to plunge,” Williamson said. “Most notable was a record fall in business confidence in the German service sector.”

Domestic Demand

The euro-area services indicator slipped to 51.5 this month from 51.6 in July, Markit said in the initial estimate. The manufacturing gauge dropped to 49.7, indicating a contraction. In Germany, the manufacturing index held steady at 52 in August, while services dipped to 50.4, a 25-month low, Markit said in a separate report.

The euro-area services gauge is “not as bad as expected, showing that in the core economies, at least, domestic demand is holding up somewhat,” van Vliet said. “But at the same time, it may merely mean that all the bad news simply hasn’t fed through yet and we’ll see a decline in the next few months.”

New business in the euro area fell for the first time in two years, Markit said. Services reported the weakest growth of new orders since September 2009, while manufacturers said new orders had fallen for a third month.

“With forward-looking indicators such as business confidence and new orders falling further, it is likely that the survey data will continue to turn down in September,” Markit’s Williamson said.

To contact the reporters on this story: Patrick Henry in Brussels at phenry8@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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