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Euro-Area Services, Manufacturing Contracted in March: Economy

Euro-Area Services, Manufacturing Shrink More Than Estimated
A Volvo Aero employee works on a fan hub frame for the General Electric Next Generation engine at the Volvo Aero factory in Trollhattan, Sweden. Source: Volvo Aero via Bloomberg

Euro-area services and manufacturing output contracted more than economists forecast in March, adding to signs the economy has slipped into recession.

A euro-area composite index based on a survey of purchasing managers in both industries dropped to 48.7 from 49.3 in February, London-based Markit Economics said in an initial estimate today. Economists forecast a gain to 49.6, according to the median of 21 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

Europe’s economy may struggle to regain strength after shrinking 0.3 percent in the fourth quarter as governments toughen budget cuts, rising oil prices erode consumers’ purchasing power and global demand weakens. In the U.K., retail sales fell more than economists forecast in February. Ireland’s economy slipped back into a recession in the fourth quarter, and Chinese manufacturing contracted this month.

“Today’s figures clearly show that the recession in the euro zone is far from over,” said Peter Vanden Houte, an economist at ING Group in Brussels. “This increases the danger that the debt crisis could come back with vengeance” by making it more difficult for governments to cut budget deficits.

The euro extended losses after the data were released, trading at $1.3160 at 12:33 p.m. in Brussels, down 0.4 percent.

Euro-Region Recession

A gauge of euro-region manufacturing fell to 47.7 in March from 49 in February, Markit said. A measure of services declined to 48.7 from 48.8. Companies cut employment levels for the third month in a row, while a gauge of new business decreased for an eighth month, today’s report showed.

Chris Williamson, chief economist at Markit, said in today’s statement that the euro-region economy probably continued to shrink in the first quarter.

“The downturn is only very mild at the moment,” he said. “However, firms are clearly focusing on cost reduction, with employment falling at the fastest rate for two years and inflows and business continued to deteriorate, reflecting weak demand across the region.”

European efforts to tackle the debt crisis advanced over the past month, as Greece reached a debt-swap deal with its private creditors and officials approved a second bailout. On March 2, euro-region leaders signed up to a tighter set of budget rules to help restore investor confidence.

ECB Measures

The European Central Bank, which supported the region’s economy with measures including 1 trillion euros ($1.3 trillion) in three-year loans to banks, on March 8 lowered its economic projections for both this year and next, forecasting a contraction of 0.1 percent in 2012. It also increased its inflation projections, partly because of rising energy costs.

In Ireland, the economy contracted in the fourth quarter, with gross domestic product falling 0.2 percent from the previous three months as exports dropped and the government cut spending, the Central Statistics Office said today. Economists in a Bloomberg survey forecast a gain of 1 percent.

U.K. retail sales dropped more than economists forecast in February, with sales including fuel declining 0.8 percent from the previous month, the Office for National Statistics said.

Herzogenaurach, Germany-based Schaeffler AG, the world’s second-largest maker of roller bearings, on March 20 forecast slower sales growth and lower profitability in 2012 as European markets weaken.

‘Positive Trend’

“We are currently seeing demand in the European markets weaken,” Chief Executive Officer Juergen Geissinger said. “Globally, however, our business is continuing to show a positive trend.”

Demand for European goods ranging from car parts to pharmaceuticals from faster-growing economies may help to soften a slowdown, with countries from Portugal to Greece and Spain projected to shrink this year, according to European Commission forecasts. Japan reported an unexpected trade surplus for February and higher-than-forecast exports, adding to signs of a rebound in the world’s third-largest economy.

In the U.S., the world’s biggest economy, the Conference Board’s gauge of the outlook for the next three to six months probably rose 0.6 percent in February after increasing 0.4 percent in the previous month, according to a Bloomberg survey.

Alstom SA, the third-largest power-equipment maker, said on March 19 it expects higher sales for its wind turbines this year and next, boosted by growing demand in Brazil. Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, said on March 13 that it plans to surpass last year’s record profit in 2012.

Reviving Confidence

“We are off to a promising start” with car sales in the first two months of the year at an all-time high, BMW Chief Executive Officer Norbert Reithofer said.

Euro-area economic confidence improved in February, German investor sentiment surged to a 21-month high this month and the Stoxx Europe 600 Index has gained 15 percent since mid-December. Euro-region industrial output rebounded in January from a slump in the previous month.

Stephane Deo, an economist at UBS AG in London, said on March 16 that “some things have not turned out quite as negatively as feared a couple of quarters back.” He now expects the euro-region economy to shrink 0.4 percent this year instead of a previously projected 0.7 percent, before expanding 1.1 percent in 2013.

‘Decisive Change’

“Germany and France look to have avoided a return to recession but only by very narrow margins,” Markit’s Williamson said today. “The further drop in the PMI is clearly a disappointment following the brief return to growth seen in January and suggests that policy makers will need to seek ways to revive economic growth across the region again.”

The ECB has already signaled it’s now up to governments to tackle the crisis further after policy makers purchased government bonds, offered banks unlimited loans for three years and lowered borrowing costs to 1 percent, a record low.

ECB council member Erkki Liikanen said in an interview on March 15 that the central bank “has done its part, the governments must do theirs.”

“We have been able to produce, from a market viewpoint, a decisive change in market sentiment,” he said. “For the fiscal side, for the deficits, for the long-term fiscal debt, it’s in the hands of governments and that belongs to them -- and only them.”

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