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Euro-Area Manufacturing, Services Expand

European services and factory output strengthened in January, led by a “robust” performance by Germany, as the region’s leaders work to find a solution to the debt crisis.

A euro-area composite index based on a survey of purchasing managers in both industries rose to 50.4, a five-month high, from 48.3 in December, London-based Markit Economics said in a report today. Still, incoming new business fell and the increase in output was partly due to companies reducing order backlogs.

European finance ministers continue talks today on crafting a long-term fix to the region’s debt crisis after calling yesterday on bondholders to provide greater debt relief to Greece. While the turmoil has undermined the recovery, some measures of investor and consumer confidence have improved and European Central Bank President Mario Draghi has said 2012 will be a “much better” year.

There is “tentative evidence suggesting that the downturn in the euro zone as a whole may be gradually bottoming out,” said Martin Van Vliet, an economist at ING Group in Amsterdam. “However, it is premature to start talking about green shoots of recovery” and “any return to positive growth later this year will likely be slow and gradual.”

Economists forecast that the composite PMI would rise to 48.5, according to the median of 17 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

Services Growth

A gauge of euro-region manufacturing rose to 48.7 from 46.9, Markit said. A measure of services climbed to a five-month high of 50.5 from 48.8. Indexes of new business and backlogs fell in both industries.

The euro rose against the dollar after the report was published before erasing its gain. It traded at $1.3001 as of 11:02 a.m. in London, down 0.1 percent from yesterday.

European finance ministers pushed bondholders to provide greater debt relief for Greece after a meeting in Brussels yesterday, denting newfound confidence in Europe’s strategy for coping with the debt crisis.

European stocks fell from a five-month high amid the stalemate. The Stoxx Europe 600 Index retreated 1 percent, while Germany’s DAX Index dropped 1.1 percent. Standard & Poor’s 500 Index futures lost 0.5 percent.

The decline in S&P 500 futures indicated the U.S. gauge will retreat from the highest level since July. The Richmond Federal Reserve Bank is due to release its manufacturing-sector activity survey for December at 10 a.m. New York time.

Staying Cautious

German manufacturing expanded in January for the first time in four months and services growth accelerated, according to a separate release from Markit. The composite index of both industries reached a seven-month high. In France, manufacturing contracted at a faster pace this month and services strengthened. Chris Williamson, chief economist at Markit, said while the euro-area economy “appears to have stabilized” he remains “cautious about the improvement.”

“If Europe incurs only a relatively mild recession that would obviously be good news for how the European debt crisis might play out,” said Stella Wang, an economist at Nomura International Plc in London. “However, we would caution against too much optimism at this stage.”

Elsewhere in Europe, Britain’s budget deficit narrowed more than economists forecast in December, slipping to 13.7 billion pounds from 15.9 billion pounds a year earlier. Gilts rose, with the 10-year yield falling 2 basis points to 2.14 percent. Bank of England Governor Mervyn King is scheduled to speak at 8 p.m. today in Brighton, England.

Japan’s Deficit

Japan’s government said today it will probably miss its goal of balancing the budget by 2020 even with its proposed doubling of the sales tax, as the country’s central bank cut its 2012 growth forecast. The Asian country’s primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, the Cabinet Office said.

The Bank of Japan cut its growth projection for the year starting April 1 to 2 percent from 2.2 percent. The central bank kept its asset-buying fund at 20 trillion yen ($260 billion), and its credit-lending program at 35 trillion yen.

Among other economic releases today, India’s central bank cut the cash reserve ratio to 5.5 percent from 6 percent and signaled future cuts. The International Monetary Fund will unveil revisions to its World Economic Outlook at 10 a.m. in Washington. Without giving specific estimates, IMF Managing Director Christine Lagarde said yesterday in Berlin that “we will lower growth forecasts for most parts of the world.”

German ‘Standstill’

Growth in Germany may have come to a “standstill” in the fourth quarter and “slightly negative growth can’t be ruled out,” the Bundesbank said yesterday. Germany’s statistics office said Jan. 11 the economy probably shrank about 0.25 percent in the final three months of last year. Spain’s central bank estimated yesterday that its economy shrank in the fourth quarter. Euro-area industrial orders fell 1.3 percent in November, according to a report today.

Still, consumer confidence in the euro area unexpectedly rose this month, the Brussels-based European Commission said yesterday. Germany’s Ifo index of business sentiment also probably increased, according to a Bloomberg survey of economists. The Ifo institute will publish the data tomorrow.

Alstom SA (ALO), the maker of power equipment and trains, on Jan. 19 reported quarterly sales that fell short of analyst estimates. Still, the company forecast “marked progress” in fiscal fourth-quarter sales on growth in emerging markets.

The ECB has cut interest rates twice since November and offered banks unlimited loans for three years to prevent a credit crunch.

“I am confident that the euro will be in better shape in 2012,” Draghi said on Jan. 19. “I look at the progress that has been achieved on the two root causes of the situation, namely lack of fiscal discipline and lack of structural reform.”

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

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

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