Euro-Area Services, Manufacturing Contracted in August: Economy

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Euro-Area Services, Manufacturing Contract for Seventh Month
A BMW employee performs the final checks on an automobile at the company's factory in Dingolfing, Germany. Photographer: Guenter Schiffmann/Bloomberg

Euro-area services and manufacturing output contracted for a seventh straight month in August, adding to signs of a deepening economic slump as European leaders struggle to contain the fiscal crisis.

A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area rose to 46.6 from 46.5 in July, London-based Markit Economics said today in an initial estimate. A reading below 50 indicates contraction. Economists had forecast an unchanged reading, the median of 19 estimates in a Bloomberg News survey showed.

Europe’s economy is edging toward a recession as budget cuts from Spain to Ireland undermine consumer spending and company investment just as global demand shows signs of cooling. In China, manufacturing may be contracting at a faster pace this month, a preliminary reading showed today. A U.S. report will probably show the number of claims for jobless benefits was little changed last week, according to a Bloomberg survey.

“The combination of financial market tensions and fiscal austerity remains an important drag on domestic demand in the euro zone, with external demand too weak to have an offsetting impact,” Julien Manceaux, an economist at ING Group in Brussels, said in an e-mailed note. “A turnaround in sentiment can only be expected when the future of the euro zone starts to look more secure. Unfortunately, that does not seem to be happening anytime soon.”

Germany, France

The euro pared gains after the report, trading at $1.2551 at 11:23 a.m. in Brussels, up 0.2 percent on the day. It has gained 3.6 percent against the dollar over the past month. The Stoxx Europe 600 Index advanced 0.2 percent.

A gauge of euro-area manufacturing rose to 45.3 from 44 in July, today’s report showed. An indicator of services output slipped to 47.5 from 47.9, Markit said. In Germany, a manufacturing gauge jumped to 45.1 from 43, while the service indicator fell to 48.3 from 50.3. France’s manufacturing and services indicators both showed an improvement from July.

European leaders are returning from vacation with agreement still elusive on measures to support Greece and prevent Spain and Italy being shut out of sovereign debt markets. French President Francois Hollande and German Chancellor Angela Merkel will meet in Berlin today.

Greek Prime Minister Antonis Samaras, who requested a two-year extension of the nation’s fiscal adjustment program, will travel to Berlin tomorrow before heading to Paris.

Creditor Limits

German Finance Minister Wolfgang Schaeuble told SWR2 public radio today that while there has to be understanding for the difficult situation of Greece, giving the country more time to meet its obligation under the international aid program would not be a solution. Creditors “went to the limits” of what’s economically justifiable, he said.

With investors growing more concerned about a euro breakup, the economy may enter a recession in the current quarter after contracting 0.2 percent in the previous three months. In Germany, Europe’s largest economy, business confidence fell more than economists forecast in July to the lowest in more than two years. Euro-area consumer confidence probably dropped for a third month in August, a Bloomberg survey shows ahead of a European Commission report at 4 p.m. in Brussels.

‘Reverse Gear’

“Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating and further signs that its export engine has slammed into reverse gear,” said Rob Dobson, an economist at Markit. “France may be edging closer to stabilization, while conditions outside the big two remain weak overall.”

Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, on Aug. 1 reported its first drop in quarterly operating profit in almost three years and said the fiscal crisis could cause “the global economic climate to cloud over further.” Hochtief AG, Germany’s biggest builder, said on Aug. 14 that full-year profit targets have become more challenging.

Euro-area unemployment held at 11.2 percent in June, a record high, with companies from Belgium to Ireland and Italy cutting jobs to weather the slump. At least six euro member states are in recessions, with Greece projected to shrink for a fifth straight year in 2012.

“Severe fiscal consolidation, rising unemployment, strict lending conditions as well as ongoing uncertainty about the euro crisis are increasingly weighing on domestic spending,” said Joost Beaumont, a senior economist at ABN Amro in Amsterdam. We expect “to see another modest contraction in gross domestic product in the third quarter.”

China Slowdown

Economies around the globe are also showing signs of slowdown. A preliminary reading of 47.8 for a purchasing managers’ index in China released today by HSBC Holdings Plc and Markit compared with July’s final 49.3 figure. If confirmed, it would be the lowest since November and the 10th month with a reading below 50. In Taiwan, industrial production had a fifth annual decline in July.

In the U.S., minutes from the Federal Open Market Committe’s July 31-Aug. 1 meeting showed many members judged that additional stimulus “would likely be warranted fairly soon” unless the pace of the economic recovery picks up. The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE, seeking to cap borrowing costs.

U.S. Unemployment

The Labor Department may report the number of initial applications for unemployment insurance payments fell by 1,000 to 365,000 last week, according to a Bloomberg survey. While a decline in firings signals the job market is stabilizing, a pickup in hiring is needed to reduce a jobless rate that has topped 8 percent for 42 straight months.

Bank of England Governor Mervyn King said on Aug. 8 that asset purchases remain the central bank’s main stimulus instrument. The U.K. central bank earlier this month maintained its bond-buying program at 375 billion pounds ($596 billion).

The European Central Bank, which in July cut borrowing costs to a record low of 0.75 percent, said on Aug. 2 that it’s ready to purchase government bonds in tandem with Europe’s rescue funds to fight the turmoil. While Germany’s Der Spiegel reported the central bank’s new program may set yield caps, the ECB responded by saying it’s “misleading to report on decisions which have not yet been taken.”

‘Unable, Unwilling’

Germany’s Bundesbank in its monthly report on Aug. 20 stepped up its criticism of the ECB plan, saying any government bond purchases would “entail significant stability risks.”

“For far too long, the ECB has been unable and unwilling to demonstrate that it will stand behind the single currency through thick and thin,” said Michael Derks, chief strategist at FXPro Group Ltd. in London. “If the ECB does decide to go it alone on this, itself a tall order, it will need to show enormous willingness and firepower, or else the market will shred their credibility again very quickly.”

The Frankfurt-based central bank will hold its next policy meeting on Sept. 6 and also publish its latest economic projections. In June, it forecast the euro-area economy would shrink 0.1 percent in 2012 before expanding 1 percent in 2013.

David Blanchflower, a professor at Dartmouth College told Erik Schatzker on Bloomberg Television’s “Market Movers” on Aug. 20 that Germany will eventually be overruled on bond buys.

“In essence what we’ve seen on a number of occasions is that the ECB had to act when the market forced is to act,” he said. “Eventually you’d think that the 16 would outvote the one and tell them to go shove it and we need a central bank to act like a central bank as the Fed and the Bank of England. This is really coming to the final battle.”

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