Euro zone downturn may have bottomed out


Published — Wednesday 5 December 2012

Last update 6 December 2012 12:59 am

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BRUSSELS: The euro zone may be past the worst of its economic downturn, a key indicator signaled yesterday, probably because the European Central Bank has underpinned confidence and because of underlying strength in the German economy analysts said.
Private sector business activity across the euro zone may have bottomed out, the survey showed, although recession is likely to last into next year.
This latest pointer to a possible easing of the gloom is in line also with a sharp easing of tension on the euro zone government bond market where a sudden surge of interest rates marked the onset of the single currency area's debt crisis.
The Purchasing Managers Index (PMI), a leading indicator compiled by the London-based Markit research firm, showed yesterday a combined manufacturing and services score of 46.5 points for November, better than a flash estimate of 45.8 and up from 45.7 in October.
"There are signs that the recession may have reached a nadir," said Markit chief economist Chris Williamson.
"The euro zone's recession looks to have deepened in the final quarter, with gross domestic product likely to have fallen by considerably more than the modest 0.1-percent decline seen in the third quarter," Williamson said. But he added that it was "reassuring to see that the final euro zone PMI reading came in higher than the earlier flash estimate.
"Services in particular surprised to the upside," he underlined.
November marked the 10th month in a row that the index was below the neutral 50-mark.
Ireland was the only euro zone country in positive territory, Markit noting that France, Italy and Spain "remained in deep contraction territory, despite rates of decline moderating in France and Spain."
The downturn in Germany also eased, they said.
"Despite the easing in the rate of decline, the region sill looks set for further contraction in the early months of 2013, as weak consumer demand in many countries combines with low levels of business confidence and falling global trade," added Williamson.
The euro zone tipped back into recession for the second time in just three years in the third quarter, data showed last month
The 17-nation euro zone economy shrank by 0.1 percent compared with output in the three months to June when it had contracted by 0.2 percent, meeting the technical definition of a recession as two consecutive quarters of decline.
In updated forecasts released last week, the OECD said it expects the euro zone economy to contract by 0.4 percent this year and 0.1 percent next year.
Howard Archer, Chief UK and European Economist at IHS Global Insight said that the PMI data was "welcome news, which lifts hope that the euro zone downturn is bottoming out."
Christian Schulz, a Senior Economist at Berenberg Bank, agreed, saying that "with financial markets supported by the ECB’s safety net and recovering global growth, the trough of the downturn may have passed in October."
He noted that most of the improvement in the overall figure was due to Germany, with the strong upward revision of the PMI from 48.0 to 49.7 indicating that the October dip was temporary and that Europe's top economy was set for a gradual recovery.
But Archer said that with both the services and manufacturing PMIs still well in contraction territory the euro zone may be headed for a slightly deeper GDP contraction in the fourth quarter.
"Furthermore, with incoming new business, backlogs of work and employment all still falling markedly in November, there remains a very real risk that the euro zone will continue to contract in the first quarter of 2013," said Archer.

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