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Euro-Area Manufacturing, Services Shrink for 6th Month: Economy

Euro-area services and manufacturing output contracted for a sixth month in July, adding to signs of a deepening economic slump.

A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area was unchanged at 46.4, the same level as in June, London-based Markit Economics said today in an initial estimate. A reading below 50 indicates contraction. In the U.S., manufacturing probably weakened in July, a Bloomberg survey shows ahead of a report due later today.

The euro-area economy may be in a recession, defined as two consecutive quarters of contraction, after the worsening debt turmoil forced Spain and Cyprus to seek international aid last month. The euro yesterday dropped below its lifetime average against the dollar and Moody’s Investors Service cut the outlook to negative for the Aaa credit rating of Germany, citing “rising uncertainty” about the fiscal crisis. In China, manufacturing may contract at a slower pace in July, a private survey indicated today.

“The purchasing managers surveys reinforce suspicion that the euro zone is headed for further clear gross-domestic-product contraction in the third quarter,” said Howard Archer, chief European economist at IHS Global Insight in London. The 17- nation economy “is having to cope with a serious tightening of fiscal policy in many countries, markedly rising unemployment, limited consumer purchasing power, tight credit conditions and muted global growth that is limiting export orders.”

Spanish Bonds

The euro was little changed against the dollar after the report and traded at $1.2108 at 11:23 a.m. in Brussels. Spanish 10-year bonds declined, pushing the yield on the securities to 7.58 percent at 10:12 a.m., a euro-era high and above the levels that forced Greece, Ireland and Portugal into bailouts.

A gauge of euro-area manufacturing fell to 44.1 this month from 45.1 in June, the report showed. That’s the lowest in 38 months, according to Markit. An indicator of services output advanced to 47.6 from 47.1, Markit said. A gauge of German manufacturing output also declined in July.

European leaders have struggled to restore investor confidence in the region’s fiscal health since Greece became the first of five nations to seek aid from international lenders. Last month, a new push for enhanced joint budgetary control and closer financial-sector integration was overshadowed by Spain and Cyprus both asking for assistance.

German Confidence

Moody’s said yesterday that the increasing likelihood of collective support for European countries including Spain and Italy is “adversely” affecting the Aaa credit ratings of Germany and the Netherlands. Officials from Greece’s troika of international creditors arrive in Athens today.

With at least six euro-area states already in a recession, Germany’s expansion helped prevent the 17-country economy from shrinking in the first quarter. The German economy, Europe’s largest, has since shown signs of slowdown, adding to concerns of a euro-area recession. German business confidence probably declined a second month in July, a Bloomberg survey shows.

In France, business confidence dropped to the lowest in 2 1/2 years in July, Paris-based statistics office Insee said.

The International Monetary Fund said earlier this month that the euro-area economy may shrink 0.3 percent this year before expanding 0.7 percent in 2013. The global economy may expand 3.9 percent next year instead of a previously projected 4.1 percent, the Washington-based fund said.

‘Severe Slump’

The EU’s statistics office will release a first estimate of euro-area second-quarter GDP on Aug. 14. ABN Amro NV estimates that GDP declined 0.4 percent in the second quarter and will shrink 0.2 percent in the third quarter.

“The euro-area downturn showed no signs of letting up at the start of the third quarter,” Chris Williamson, Markit’s chief economist, said in the report. “The downturn is being led by an increasingly severe slump in manufacturing, where output is falling at a quarterly rate of around 1 percent.”

China’s preliminary reading was 49.5 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit. In the U.S., the world’s largest economy, an index based on a survey of purchasing managers at factories probably dropped to 52 in July from 52.5 in June, according to a Bloomberg survey.

With global demand cooling and consumers holding back spending, European companies may be forced to continue to cut costs and eliminate jobs over the coming months. Euro-area unemployment rose to 11.1 percent in May, a euro-era record.

Some Stores

Puma SE (PUM), Europe’s second-largest sporting-goods maker, on July 18 cut its 2012 sales and profit forecasts and said it will close some stores and may also eliminate jobs after business slowed in the first half of the year. The slowdown was particularly noticeable in Europe, the Herzogenaurach, Germany- based company said.

“A turnaround in sentiment can only be expected when the future of the euro zone starts to look more secure,” Peter Vanden Houte, an economist at ING Group in Brussels, said in an e-mailed note today. “Unfortunately, that does not seem to be happening anytime soon.”

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

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

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