March 5 (Bloomberg) -- Euro-area services output shrank more than estimated in February, led by Italy and Spain, as the region’s economy struggled to rebound from a contraction in the fourth quarter.
An index based on a survey of purchasing managers in the services industry dropped to 48.8 from 50.4 in January, London-based Markit Economics said on its website today. That’s below an initial figure of 49.4 published on Feb. 22. 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. The euro area’s economic woes have crimped the expansion of export-driven economies in Asia, where China pared its economic growth target today to 7.5 percent from an 8 percent goal in place since 2005.
Howard Archer, chief European economist at IHS Global Insight in London, said today’s report suggests that the euro-area economy will shrink in the first quarter, sending the region into recession after a 0.3 percent contraction in the fourth quarter.
“The region is still facing major headwinds, notably including increased fiscal tightening in many countries and markedly rising unemployment,” he said. The debt crisis is “far from resolved despite the recent bailout deal for Greece,” while high oil prices are “an increasing concern for businesses’ margins and consumers’ purchasing power.”
The euro declined to as low as $1.3160 after the report before rebounding. It traded at $1.3189 as of 11:17 a.m. in London, up less than 0.1 percent on the day. The Stoxx Europe 600 Index retreated 0.7 percent and the MSCI Asia Pacific Index declined 0.9 percent.
China’s growth-target cut, announced by Premier Wen Jiabao in his state-of-the-nation speech in Beijing, signals that the country’s leaders are determined to reduce reliance on exports and capital spending in favor of consumption.
“The growth target indicates the lowest level that the government is comfortable with and is also a signal to local officials that they shouldn’t solely focus on the rate of expansion,” said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong. “China’s trend growth rate is coming down but it’s still higher than this, more like around 9 percent.”
Elsewhere in Asia, India’s services industries expanded at a slower pace in February, according to an index released today by HSBC Holdings Plc and Markit. U.K. services growth also cooled last month, according to a separate report. A gauge of activity fell to 53.8 from 56. The median forecast of 29 economists in a Bloomberg News survey was for a reading of 55.
In the U.S., the Institute for Supply Management may say service industries grew at a slower pace in February, while a Commerce Department report may show orders to U.S. factories fell in January.
The European Union, attempting to turn the page on the two-year-old debt crisis, faces a first test this week as Greece’s private creditors decide whether to sign off on a 106 billion-euro ($140 billion) debt swap.
The success of the biggest sovereign-debt restructuring in history, which was confirmed on the eve of last week’s EU summit, depends on how many investors agree to the writedown by a March 8 deadline. Euro-area finance ministers will hold a teleconference on March 9 to review the deal’s outcome.
Today’s euro-area services figure dragged down Markit’s composite index of the services and manufacturing industries to 49.3 from 50.4 in January, below an initial figure of 49.7. The manufacturing gauge came in at 49, in line with the estimate.
“It remains a close call” whether the euro-area economy will shrink in the current quarter, sending the region into recession, said Chris Williamson, Markit’s chief economist. “At this stage, our best estimate is that the region’s GDP will have contracted by 0.1 percent in the first three months.”
The 17-nation euro economy may shrink 0.3 percent this year, driven by a contraction of 1.3 percent in Italy and 1 percent in Spain, the European Commission said on Feb. 23. Germany’s economy, Europe’s largest, will expand 0.6 percent, according to the commission. The gauge of services in Germany slipped to 52.8 last month from 53.7 in January.
Williamson said the “steep declines” indicated by services surveys for Italy and Spain suggest that their return to growth “still looks to be a long way off.” The Purchasing Managers’ Index for Spanish services dropped to 41.9 in February from 46.1 a month earlier, while the gauge for Italy declined to 44.1 from 44.8.
“Persistent weakness in countries such as Italy and Spain will also subdue any growth in other euro-area countries which traditionally depend on trade within the region, constraining recoveries in Germany, France and other northern euro nations,” Williamson said.
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