European Services, Manufacturing Growth Weakens

Growth in Europe’s services and manufacturing industries weakened more than economists forecast in September, adding to evidence the recovery in the region is losing steam.

A composite index based on a survey of euro-area purchasing managers in both industries declined to 53.8 from 56.2 in August, London-based Markit Economics said today. Economists expected a reading of 55.7, according to the median of 15 forecasts in a Bloomberg News survey. A reading above 50 indicates expansion.

Growth in Europe is slowing as the global economy cools and austerity measures aimed at reducing budget deficits and reining in borrowing costs undermine the recovery. Europe’s expansion will slow to a more “moderate” pace in the second half, the European Commission projected last week.

“It’s clear that cracks are emerging in the recovery story,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “People were hoping that domestic demand would offset the drag from slower exports, but fiscal tightening is limiting the scope for domestic demand to pick up the baton.”

European stocks fell for a third day and the euro weakened against the dollar. The Stoxx Europe 600 Index slid 0.5 percent to 259.88 at 3:06 p.m. in London and the euro declined 0.7 percent to $1.3317.

Industrial Orders

Euro-area growth probably slackened to 0.5 percent in the current quarter from 1 percent in the previous three months, the Brussels-based commission forecast on Sept. 13. Industrial orders declined more than forecast in July, the European Union’s statistics office said yesterday.

In Germany, Europe’s largest economy, investor confidence dropped to a 19-month low this month, the ZEW Center for European Economic Research in Mannheim said on Sept. 14. German business sentiment probably declined in September after an unexpected increase in August, according to the median of 36 estimates in a Bloomberg survey. The Munich-based Ifo is scheduled to publish the indicator at 10 a.m. tomorrow.

Pernod Ricard SA, the maker of Chivas Regal whiskey and Absolut vodka, on Sept. 2 reported full-year profit that missed analysts’ estimates as sales declined in western Europe and the U.S., while the company said it saw “persisting difficulties” in western Europe. Diageo, the world’s largest spirits maker, said on Aug. 25 that it is “cautious” about the outlook for the European and North American consumer markets.

Fastest Pace

Reviving exports helped the euro-area economy expand 1 percent in the second quarter, the fastest pace in four years. The Brussels-based commission said last week that growth may weaken to 0.5 percent in the current quarter and 0.3 percent in the year’s final three months. Nobel Prize-winning economist Joseph Stiglitz said on Sept. 20 that he sees “very limited growth” in Europe.

The recovery is “uneven” among European countries as financial markets have only “partly recovered” from tensions in May when European leaders created a rescue package to stem contagion from the Greek fiscal crisis, the commission said. While German GDP jumped 2.2 percent in the second quarter from the previous three months, Spain expanded 0.2 percent. Growth in Portugal, which is facing a surge in borrowing costs, slowed to 0.3 percent in the second quarter.

The extra yield investors demand to hold Portuguese debt rather than German equivalents rose to 392 basis points on Sept. 20, a euro-era high, while the premium on Irish debt surged to 401 basis points, as investors questioned those nations’ ability to rein in their budget deficits with the austerity measures already in place.

“Continued tension on markets underlines the fact that more is needed and as the fiscal squeeze tightens we’ll see domestic spending in those countries weaken further,” said Jennifer McKeown, a European economist at Capital Economics in London. “Even in the stronger countries like Germany the fiscal squeeze is going to start from next year.”