Euro zone risks return to contraction, China outlook smoggy

December 3
7:08 AM 2014

The euro zone economy may face another contraction after business activity grew less than expected in November despite heavy discounting, surveys on Wednesday showed, although Asian readings were more upbeat.

Firms across the euro zone cut prices again. That, and signs that the bloc's core economies are struggling, will concern the European Central Bank which has launched a raft of measures to revive growth and drive up dangerously low inflation.

In contrast, a survey covering China's services industry showed slightly faster expansion. But after data on Monday said manufacturing growth was its weakest in at least six months, it may not be enough to allay concerns about a softening economy.

"There are clear downside risks to various areas of the world economy including the euro zone and to some extent China," said Philip Shaw, chief economist at Investec. "The euro zone numbers do indicate the economy is moving forwards but at a snail's pace, (and) the pressure remains on the ECB."

Markit's final November Composite Purchasing Managers' Index (PMI), based on surveys of thousands of companies across the euro area and seen as a good indicator of growth, sank to 51.1 from October's 52.1, missing an earlier flash reading of 51.4.

November was the 17th month the index has been above the 50 level that separates growth from contraction. But the new business index fell below that mark for the first time since the middle of last year, suggesting a further downturn in December.

"The region is on course to see a mere 0.1 percent GDP growth in the final quarter of the year, with a strong likelihood of the near-stagnation turning to renewed contraction in the new year unless demand shows signs of reviving," said Chris Williamson, Markit's chief economist.

A Reuters poll last month predicted 0.2 percent economic growth this quarter and 0.3 percent next. EUGDPQ

A PMI covering the region's dominant service industry fell to 51.1 from October's 52.3 and showed firms have been cutting prices for three full years now to drum up business.

Retail sales, a proxy for household demand and one of the weaker elements of the euro zone's slow and fragile recovery, picked up less than expected last month, official data showed.

Inflation dipped to 0.3 percent in November on a year earlier, deep into the ECB's "danger zone" for price moves, although the central bank is not expected to further ease already very loose policy when it meets on Thursday.

The ECB is offering banks long-term cheap loans and buying covered bonds and asset-backed securities. But facing resistance from Germany, there is only an even chance it will buy government bonds, a Reuters poll found last week.

Conversely, the Bank of England is expected to begin tightening policy next year and after a survey showed its services sector expanded more than expected last month, recently revised forecasts for a later hike may be brought back in.

The data will be welcomed by Finance Minister George Osborne who gives a half-yearly update on official growth and borrowing forecasts later on Wednesday, his penultimate such statement before May's national election.

Other figures due later on Wednesday are expected to show an acceleration in activity in the United States' vast service industry. ECONUS


China's official non-manufacturing PMI rose to 53.9 in November from 53.8 while a separate services PMI published by HSBC/Markit inched up to 53.0 last month from October's 52.9, as new orders rose at their quickest pace in 2-1/2 years.

But the surveys painted a mixed picture of the labor market, which Chinese leaders say is a crucial consideration when setting policy. Along with Monday's news, that prompted some economists to predict China would cut interest rates again in coming months after doing so unexpectedly on Nov. 21.

"Things have gotten worse rather than better," said Louis Kuijs, an economist at RBS in Hong Kong, adding that any bottoming out in China's sagging housing market is unlikely to lead to a solid rebound next year.

"I predict one more rate cut to lower lending rates to 5.25 percent in the first quarter," he said.

In other upbeat data from the region, activity in India's services industry expanded at its fastest rate in five months although the outlook was clouded by tumbling confidence.

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