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European Services, Manufacturing Growth Weakened in June

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European Services, Manufacturing Growth Weakened in June
An employee inspects a Renault SA vehicle on the production line at the Renault factory in Valladolid, Spain. While countries from Spain to Ireland are stepping up spending cuts, clouding growth prospects, an export boom in Germany helped drive the region’s recovery. Photographer: Markel Redondo/Bloomberg

July 5 (Bloomberg) -- European services and manufacturing growth slowed more than estimated in June, as the region grappled with a worsening debt crisis.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 53.3 from 55.8 in May, London-based Markit Economics said today. That’s the biggest drop since November 2008. Markit had initially reported a drop to 53.6. A reading above 50 indicates growth.

European finance ministers authorized an 8.7 billion-euro ($12.6 billion) loan payout to Greece earlier this month to avert the region’s first sovereign default and restore investor confidence. While countries from Spain to Ireland are stepping up spending cuts, clouding growth prospects, an export boom in Germany helped drive the region’s recovery. The European Central Bank has signaled it will raise borrowing costs on July 7.

The economy “faces fiscal tightening increasingly kicking in across the region, higher interest rates, heightened sovereign-debt tensions and currently slowing foreign demand,” said Howard Archer, chief European economist at IHS Global Insight in London. “The ECB could hold off from acting for some time to come after the signaled July interest rate hike.”

Double-Dip Recession

A manufacturing gauge fell to 52 from 54.6 in May, Markit said on July 1. That’s the lowest in 18 months. The services indicator dropped to 53.7 from 56 in the previous month, the weakest pace since October.

Euro-region gross domestic product probably rose 0.6 percent in the second quarter after increasing 0.8 percent in the previous three months, according to Chris Williamson, chief economist at Markit. The German economy, Europe’s largest, was the only nation showing a PMI “consistent with strong quarterly GDP growth in June,” while indicating “modest growth rates” in France and Spain with a risk of a double-dip recession in Italy, he said.

“However, the further loss of momentum in June bodes ill for the third quarter and suggests that growth may weaken further unless order books improve,” Williamson said in a statement today. “Particularly concerning is the lack of growth of manufacturing order books, as demand for goods has provided the impetus to the recovery so far.”

The ECB lowered its 2012 euro-region growth forecast last month to 1.7 percent from 1.8 percent and projected the economy to grow 1.9 percent this year. President Jean-Claude Trichet said on June 30 that it’s up to governments to tackle the debt crisis, signaling policy makers are ready to raise the benchmark interest rate further to fight price pressures.

The Frankfurt-based central bank will probably increase its main lending rate by 25 basis points to 1.5 percent, according to all 54 economists in a Bloomberg News survey. The ECB will publish its decision on July 7 at 1:45 p.m.

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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