Europe’s Economy Strains as Global Slowdown Takes its Toll

Central Banks' Race to the Bottom on Negative Rates
  • Gauge of economic activity falls to lowest in more than a year
  • Markit Economics says price cuts will increase pressure on ECB

The euro area is showing signs of strain from the global slowdown.

Weaker growth and deeper price cuts by companies, as captured in a monthly report by Markit Economics published Monday, will raise concerns about the health of the economy. They may also increase pressure on European Central Bank policy makers to add to stimulus at their next meeting in March.

Markit said that its composite Purchasing Managers Index for the euro zone fell to 52.7, the lowest in more than a year, from 53.6. In Germany, manufacturing took a hit from falling overseas demand, while the composite gauge for France signaled “sluggish” economic growth.

“Not only did the survey indicate the weakest pace of economic growth for just over a year, but deflationary forces intensified,” said Chris Williamson, chief economist at Markit in London. The data “greatly increase the odds of more aggressive stimulus from the ECB.”

The Organization for Economic Cooperation and Development cut its forecasts for the euro region last week, and ECB officials are reviewing whether their current stimulus program is enough to counter global pressure. They’ve expressed concern that a renewed slump in oil prices is adding to risks that low inflation becomes entrenched.

Markit said euro-region economic growth this quarter may fall short of the 0.3 percent seen at the end of 2015.

“This month’s PMI indicates further deflationary pressures in the euro zone," said Bert Colijn, an economist at ING in Amsterdam. “As businesses continue to charge less for goods and services, it seems unlikely that inflation will pick up in the months ahead, which could be an additional trigger for the ECB to act in March.”

Markit’s German factory index fell to 50.2 this month, barely above the key 50 level that divides expansion from contraction.

“The German economy appears to be in the midst of a slowdown,” said Oliver Kolodseike, an economist at Markit. Manufacturing is “near stagnation,” he said.

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