European Services, Manufacturing Shrink for Third Month: Economy

Euro-area services and manufacturing output declined for a third month in April as the economy struggled to rebound from a fourth-quarter contraction.

A euro-area composite index based on a survey of purchasing managers in both industries fell to 47.4, a five-month low, from 49.1 in March, London-based Markit Economics said in an initial estimate today. Economists had forecast an increase to 49.3, according to the median of 17 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

Budget cuts by governments and surging unemployment are curbing the pace of Europe’s economic recovery as officials across the region battle the sovereign-debt crisis. Manufacturers from Europe to China have been buffeted as the fiscal squeeze has crimped demand.

“Not only does it look highly likely that the euro zone suffered further economic contraction in the first quarter of 2012 after gross domestic product fell 0.3 percent quarter-on- quarter in the fourth quarter of 2011, but the April purchasing managers’ surveys suggest that a third quarter of GDP contraction is firmly on the cards for the second quarter of 2012,” said Howard Archer, an economist at IHS Global Insight in London.

The euro pared losses after the report was released, trading at $1.3151 at 11:32 a.m. in Brussels, down 0.5 percent. The Stoxx Europe 600 Index was down 2 percent to 252.75.

Chinese Manufacturing

A gauge of euro-area manufacturing tumbled to 46 in April, a 34-month low, from 47.7 in March, Markit said. A measure of services dropped to a five-month low of 47.9 from 49.2.

The economy of the 17-nation euro area shrank 0.3 percent in the fourth quarter and the European Central Bank predicts a contraction of 0.1 percent for this year as a whole. Officials are counting on low interest rates, emergency crisis measures and export demand from outside the region to aid the recovery.

In Asia, China’s manufacturing may shrink for a sixth month in April, maintaining pressure on officials to adopt more policies to stimulate economic growth.

The 49.1 preliminary reading of the purchasing managers’ index from Markit and HSBC Holdings Plc today compares with a final 48.3 in March. The contraction, if confirmed in the final reading due May 2, would be the longest since the global financial crisis and may spur the government to lower banks’ reserve requirements a third time since November.

ECB Stimulus

U.S. companies, by contrast, are growing more upbeat about the country’s economy this year and plan to take on more workers as demand improves, a survey showed.

Some 78 percent of businesses, the most in a year, project the world’s largest economy will expand more than 2 percent in 2012, according to the National Association for Business Economics’ April survey released today in Washington. The share is up from 65 percent in the group’s January report.

In response to Europe’s fiscal crisis, the ECB left its benchmark rate at a record low of 1 percent this month and has pumped about 1 trillion euros ($1.3 trillion) into the banking system to secure the supply of credit to households and companies.

Volkswagen AG (VOW), Europe’s largest carmaker, last week predicted a “very demanding” 2012 as the debt crisis threatens economic stability. Still, Chief Executive Officer Martin Winterkorn said he’s “convinced” the company “can approach the coming months with confidence.”

German business and investor confidence has beaten forecasts every month this year, suggesting the strength of Europe’s largest economy may have been underestimated.

Today’s survey “signaled a faster rate of economic contraction in the euro zone during April, extending what appears to be a double-dip recession into a third consecutive quarter,” said Chris Williamson, Markit’s chief economist.

“With price pressures easing,” he said, the report “suggests that policymakers will worry about growth rather than inflation in coming months.”

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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