Global Services Weaken as Europe Slumps: Economy

Photographer: Chris Ratcliffe/Bloomberg

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Photographer: Chris Ratcliffe/Bloomberg

A passenger passes automated check-in machines inside Terminal 1 at Heathrow airport, in London.

Services industries from Asia to Europe cooled last month after the euro-area debt crisis pulled economies including Spain and Italy into recession and damped global growth prospects.

The purchasing managers’ index fell to 53.7 in September from 56.3 in August, the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing said today. That’s the lowest since at least March 2011. In the euro-area, a gauge slipped to 46.1 last month from 47.2 and a U.K. measure also fell. Readings below 50 indicate contraction.

China’s weaker services number underscores a slowdown that spurred the Asian Development Bank to lower its 2012 regional growth estimate. As Europe’s economic slump deepens amid a fiscal squeeze and weakening confidence, the ADB said the threat of a “shock emanating from the unresolved euro-area sovereign debt crisis” is among the biggest downside risks to Asia.

“The global environment will remain challenging,” said Silvio Peruzzo, an economist at Nomura International Plc in London. “In the euro area, there’s a lack of demand because of austerity; some countries have suffered more than others. We expect the economy to shrink again in the third quarter with a significant chance for another contraction in the fourth.”

British Stagnation

The MSCI Asia Pacific Index (MXAP) slipped 0.3 percent today. In Europe, the Stoxx Europe 600 Index fell 0.1 percent at 1:14 p.m. in Frankfurt. The euro was little changed versus the dollar, trading at $1.2905.

In Britain, a services measure dropped more than economists forecast to 52.2 in September from 53.7. Markit said the underlying trend in the U.K. economy is near stagnation.

A composite index of euro-area manufacturing and services industries fell to 46.1 from 46.3, Markit also said today. In Germany, the region’s largest economy, France and Italy, the services indicators were all below 50 last month. The gauge for Spain dropped to 40.2 from 44.

“It seems inevitable that the region will have fallen back into recession in the third quarter,” said Markit Chief Economist Chris Williamson. There “seems little scope for a return to growth in the fourth quarter,” he said.

Recession Risk

Euro-area governments may find it more difficult to plug their budget gaps with at least five euro nations already in recession and the fiscal crisis spreading from the periphery to core countries. In Germany, business confidence unexpectedly declined to the lowest in more than 2 1/2 years in September. French consumers also grew more pessimistic last month.

Joachim Fels, chief economist at Morgan Stanley, said the euro area’s economic gloom will deepen.

“First of all there’s still fiscal tightening going on,” Fels told Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance” on Oct. 1. “We have a global economy that has entered what I call the twilight zone -- that’s the fuzzy area between sustained expansion and renewed recession. The global data are still weakening. There are domestic and global reasons why the economy in Europe is weakening further.”

Separately today, euro-area retail sales barely grew in August, rising 0.1 percent from the previous month, the European Union’s statistics office said. Sales dropped 1.3 percent from a year earlier. the report showed.

Asian Outlook

With consumers holding back spending and global demand faltering, European companies may struggle to maintain their sales growth. Daimler AG, the world’s third-largest luxury- vehicle maker, said on Sept. 20 that earnings at its car division will drop in 2012. Royal DSM NV Chief Executive Officer Feike Sijbesma said last month that he remains cautious about the near-term economic outlook.

The ADB forecast that Asia excluding Japan will expand 6.1 percent this year, the slowest pace since 2009. The growth projection for developing Asia this year compares with a July estimate of 6.6 percent and an April prediction of 6.9 percent.

“The possibility of a shock emanating from the unresolved euro-area sovereign debt crisis or a sharp fiscal contraction in the U.S. pose the biggest downside risks to the economy,” the ADB said. “Fortunately, most developing Asian economies have room to counteract such shocks with fiscal and monetary policy.”

ECB Decision

Service industries in the U.S. probably expanded in September at about the same pace as in the prior month, indicating the biggest part of the economy is making scant progress. The Institute for Supply Management’s non- manufacturing index, which covers almost 90 percent of the economy, fell to 53.4 last month from 53.7 in August, according to the median forecast of 77 economists in a Bloomberg survey.

The European Central Bank, which has pledged to purchase government bonds along with the region’s rescue fund to fight the fiscal crisis, will leave its benchmark interest rate at 0.75 percent at a meeting tomorrow, a Bloomberg survey shows. The central bank last month lowered its euro-area economic forecast for this year, predicting a contraction of 0.4 percent instead of 0.1 percent. In 2013, th economy may expand 0.5 percent, it said. That’s half the pace projected in June.

The euro-area economy contracted 0.2 percent in the second quarter from the previous three months.

“Essentially flat retail sales in August and deepened service sector contraction in September makes further euro-zone gross domestic product contraction in the third quarter look ever more inevitable,” said Howard Archer, chief European economist at IHS Global Insight in London. “This would put the eurozone back into recession in every sense of the word.”

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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