Euro-Area Manufacturing, Services Unexpectedly Contract Amid Budget Cuts

European services and manufacturing output unexpectedly shrank in February as the euro-area economy struggles to rebound from a contraction in the fourth quarter.

A euro-area composite index based on a survey of purchasing managers in both industries dropped to 49.7 from 50.4 in January, London-based Markit Economics said in an initial estimate released by e-mail today. Economists had forecast a reading of 50.5, according to the median of 16 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

Budget cuts by governments may curb the pace of Europe’s recovery as countries across the region battle the sovereign- debt crisis. At the same time, China’s manufacturing may shrink for a fourth month in February, indicating the world’s second- biggest economy remains vulnerable to a deeper slowdown as Europe’s crisis caps exports.

“We see some signs of stabilization but it’s still too weak to conclude that we’ll be able to avert a recession,” Jens Kramer, an economist at NordLB in Hanover, Germany. “Germany and France helped counter some of the slack, but tougher consolidation measures in countries like Spain or Portugal will continue, which means that it will probably have a negative impact on the economic performance into 2013.”

A gauge of euro-region manufacturing rose to 49 in February from 48.8 in January, Markit said. A measure of services fell to 49.4 from 50.4.

Largest Economy

In Germany, Europe’s largest economy, the nation’s services and manufacturing expansion unexpectedly slowed. The German factory gauge fell to 50.1 from 51, while the services index declined to 52.6 from 53.7, according to a separate release from Markit. The composite index of both industries in Germany fell to 52.9 from 53.9 in January.

In France, an index of manufacturing rose to 50.2 from 48.5, while a services measure fell to 50.3 from 52.3.

Greece yesterday reached a debt-swap deal with its private creditors aimed at averting default and ending a fiscal crisis that has damped confidence across the continent.

As Europe struggles to recover, some companies are benefiting from growth in Asia and emerging markets. Pernod Ricard SA (RI), France’s biggest distiller, raised its annual earnings forecast on Feb. 16 as Chinese consumers increased purchases of spirits such as Martell cognac.

Chinese Manufacturing

In China, an index from HSBC Holdings Plc (HSBA) and Markit Economics of the manufacturing industry showed a preliminary February reading of 49.7 today, compared with a final 48.8 in January. January and February economic data are distorted by a weeklong holiday.

Euro-area consumer confidence improved for a second month in February, with a report yesterday showing an index of sentiment rose to minus 20.2 from minus 20.7. Still, government austerity measures and unemployment at the highest in almost 14 years may restrain household spending.

“The prospects for euro-zone consumer spending still look far from promising in the near term at least,” said Howard Archer, chief European economist at IHS Global Insight in London. “It is still more likely than not that the euro zone will see further economic contraction overall in the first quarter.”

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

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

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