EUROPE BUSINESS NEWS
NOVEMBER 24, 2011
Euro-Zone Activity in Decline
By PAUL HANNON
LONDON—The euro-zone economy seems set for a contraction in the final three months of this year as the turmoil in government bond markets takes its toll on credit availability and consumer and business confidence.
A survey of purchasing managers published Wednesday indicated that private-sector activity declined for the third-straight month in November, while the European Union's official statistics agency Eurostat said new orders booked at factories around the 17 countries that share the euro fell in September at the fastest pace since December 2008.
Markit Economics said the composite purchasing-managers index for the euro zone rose to 47.2 from 46.5, remaining below the 50.0 level that distinguishes expansion from contraction.
The PMIs for October and November suggest it is very likely that the euro-zone economy will contract in the current quarter, since government spending is also slowing as austerity programs designed to cut high levels of debt are being implemented across the currency area.
"Overall, the survey data suggest that the euro zone is contracting at a quarterly rate of approximately 0.6% in the fourth quarter," said Chris Williamson, an economist at Markit. "As feared earlier in the year, [the] malaise has spread from the periphery to the core."
Purchasing managers also reported that new orders declined for the fourth-straight month, indicating that activity is unlikely to pick up soon.
The decline in new orders appears to have begun in earnest in September, with Eurostat reporting a 6.4% decline from August. The month-to-month decline was the sharpest since December 2008, when orders fell by 10.2% as businesses around the world cut back on output in response to the uncertainty created by the earlier collapse of Lehman Brothers.
Some economists now believe that the period of economic contraction won't be confined to the fourth quarter, and will continue into 2012.
"November's...PMI surveys provided further support for our view that the damaging effects of the euro zone's ongoing debt crisis are likely to push the region's economy back into a deep and protracted recession," said Jonathon Loynes, chief European economist at Capital Economics.
Capital Economics is already forecasting that the euro zone's gross domestic product will fall by 0.5% in 2012, but Mr. Loynes said recent evidence suggests that "downside risks" to the projection are "building rapidly."
Standard & Poor's also warned Wednesday of a high risk of recession in a large part of the euro area next year if sovereign yields remain elevated and the zone's banks continue to crimp their balance sheets.
However, greater fiscal integration and cross-border transfers could help alleviate some of the imbalances and do much to alleviate the pressures facing troubled euro area economies, David Beers, managing director of sovereign ratings at S&P, told a business conference in Dublin.
"And a recession in the zone, if protracted, would undoubtedly undermine fiscal consolidation efforts, including those in this country, and intensify downward pressures on the creditworthiness of a number of euro area sovereigns," Mr. Beers said.
The stakes are so high that S&P expects to see greater cooperation between the European Central Bank and the European Union in resolving the crisis, warning that more delay all but guarantees extending the crisis.
Meanwhile, the currency area's fiscal crisis appears to be affecting private-sector activity in a number of ways. Austerity programs that are being implemented in most of the currency area's members are reducing demand for goods and services, as well as leading to increased unemployment. That in turn is damaging confidence among consumers and businesses.
The impact of the crisis on sentiment was evident in a survey of French businesses released Wednesday. Conducted by the national statistics agency, it found that confidence among manufacturers weakened in November, as did confidence among other businesses.
And on top of those effects, the losses banks are taking on their huge holdings of government bonds are reducing their ability to provide needed credit to both households and businesses across the euro zone.
The sector that appears most affected is manufacturing, with the survey of purchasing managers indicating output fell for the fourth-straight month to reach its lowest level since June 2009.
By contrast, the contraction in the services sector eased significantly, driven in large part by a rise in demand in Germany. That may reflect the fact that thus far, the fiscal crisis hasn't halted the creation of new jobs in the currency area's largest economy, while wages also appear to be rising more rapidly than in recent years.
However, it is far from clear that a pickup in German consumer demand, which helped drive growth in the third quarter, can be sustained for long or be of help to the currency area's weaker economies.
— Ilona Billington in London, Eamon Quinn in Dublin and William Horobin in Paris contributed to this article.
Write to Paul Hannon at paul.hannon@dowjones.com
From http://online.wsj.com/
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