Euro Manufacturing, Services Shrink as Crisis Deepens: Economy

Euro-area services and manufacturing output contracted at the fastest pace in almost three years in May, adding to signs the economy is suffering under the worsening sovereign-debt crisis.

A composite index based on a survey of purchasing managers in manufacturing and services dropped to 46 from 46.7 in April, London-based Markit Economics said today. While above an initial estimate of 45.9, the May reading is the lowest since June 2009. The indicator has been below 50 -- indicating contraction -- for four months. Separate reports showed euro-region retail sales and German factory orders declined in April.

European companies are cutting back on hiring and spending as the intensifying fiscal crisis damps the economic outlook. While the 17-nation euro area narrowly avoided falling into a recession in the first quarter, unemployment has since reached the highest on record and economic confidence is at the lowest since 2009.

Today’s data point “to markedly contracting activity and further weakness ahead,” said Howard Archer, chief European economist at IHS Global Insight in London. “It is odds-on that the euro zone is headed for renewed and appreciable contraction in the second quarter.”

German stocks dropped to a five-month low, while European shares rose after four days of declines. The Stoxx 600 added 0.3 percent at noon in London. The euro fell to $1.2441 from $1.2540 earlier today.

European Funds

Investors are growing more concerned about the debt crisis after inconclusive Greek elections raised the prospect of a breakup of the single currency and as Spain struggles to recapitalize its banks. Spanish Budget Minister Cristobal Montoro today called for European funds to be used to shore up the nation’s banks.

Finance ministers and central bank governors from the Group of Seven will hold a call today to discuss the debt crisis. The G-7 discussions precede a summit of leaders from the Group of 20 on June 18-19 in Los Cabos, Mexico.

The fiscal crisis is clouding the outlook for economies and companies from Portugal to Germany. Bayerische Motoren Werke AG, the world’s biggest maker of luxury vehicles, predicted on June 1 that the German car market won’t grow in 2012 as the debt turmoil weighs on consumer spending.

German Orders

German factory orders, adjusted for seasonal swings and inflation, declined 1.9 percent in April from March, when they jumped 3.2 percent, the Economy Ministry in Berlin said today. Economists forecast a drop of 1.1 percent for April, according a Bloomberg News survey. From a year ago, orders fell 3.8 percent when adjusted for work days.

Euro-area retail sales dropped 1 percent from March, when they advanced 0.3 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 0.1 percent, according to a separate survey. From a year earlier, April sales fell 2.5 percent.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield,” Chris Williamson, chief economist at Markit, said in today’s PMI report. “It would not be surprising” to see the euro-area economy “contract by 0.5 percent in the second quarter,” he said.

Asia, U.S.

The European Commission predicts a 0.3 percent economic contraction this year, with countries from Spain to the Netherlands in recession. Germany, Europe’s largest economy, will notch 0.7 percent growth, according to the Brussels-based commission.

In Asia, China’s non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing. The purchasing managers’ index fell to 55.2 in May from 56.1 in April, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. That’s the lowest reading since March 2011, when the federation started seasonally adjusting the data.

In the U.S., service industries probably grew in May at the same pace as the prior month, a sign the world’s largest economy is failing to gain momentum as employment slows and the European crisis intensifies, economists said before a report today.

An index of euro-area services activity declined to 46.7 in May from 46.9 in April, while a gauge of euro-area manufacturing decreased to 45 from 45.9, according to Markit.

The European Central Bank will release its latest economic projections for this year and next when council members meet in Frankfurt tomorrow. ECB President Mario Draghi will also announce whether the central bank will continue to lend banks unlimited liquidity at its benchmark rate, currently at a record low of 1 percent.

Today’s data “intensifies the pressure on the ECB to cut interest rates further, and sooner rather than later,” IHS’s Archer said.

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