Euro zone teetering on brink of recession

LONDON Wed Feb 22, 2012 8:24am EST

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LONDON (Reuters) - The euro zone economy is in danger of tipping into recession, with the services sector shrinking this month along with manufacturing, tempering a wave of optimism after a new bailout deal for Greece struck this week.

Surveys of purchasing managers published on Wednesday showed unexpectedly weak activity in the region's most powerful economy, Germany, and in France.

This is as well as in the bloc's floundering debtor states, such as Spain, where unemployment is running at 23 percent, and Greece where the euro debt crisis began more than two years ago and continuous cuts have provoked riots.

The Markit Eurozone Composite Flash PMI, a good leading indicator of overall economic growth, fell to 49.7 in February from 50.4 last month, below expectations for a rise to 50.6 and under the 50 line that divides growth from contraction.

That weakness was echoed in China, whose PMI showed export orders falling in their worst performance in eight months. Europe is China's biggest export market.

Older data published on Wednesday, official figures on euro zone industrial orders for December, showed there had been some stabilization at low levels. Manufacturing orders in the 17 countries that share the euro rose 1.9 percent on the month, beating the 0.7 percent predicted in a Reuters poll and reversing a 1.1 percent fall in November.

But with euro crisis curtailing on British business with the bloc, two Bank of England policymakers voted earlier this month for an even bigger stimulus to the economy in February than the extra 50 billion pounds ($79 billion)that their colleagues agreed to pump into the economy, minutes to the BoE's February 8-9 meeting showed on Wednesday.

STUCK IN LOW GEAR

Several economists said the euro zone PMI reports suggested no growth in the current quarter, reigniting worries about a mild recession after a raft of more upbeat data in recent weeks.

"The economy remains stuck in low gear," said Peter Dixon at Commerzbank. "It's indicative of a flatlining economy, maybe slightly contracting rather than a major slowdown. It doesn't bode well for the first quarter."

The euro and European shares edged lower on Wednesday but did not show any strong reaction to the data.

The latest euro zone data were collected largely before euro zone finance ministers agreed a 130 billion euro ($172 billion) bailout for Greece in the early hours of Tuesday morning.

But while that buys time to stabilize the currency bloc, deep doubts remain about Greece's ability to emerge from its economic slump and to avoid default in the longer term.

The PMIs showed the euro zone's two biggest economies, Germany and France, struggling to grow even as the gap between them and the struggling periphery widens.

The euro zone services PMI fell to 49.4 from January's 50.4, missing even the lowest forecast in a Reuters poll of 44 economists whose predictions centered on a rise to 50.6.

"(It) puts a bit of a dent in hopes that the fourth quarter's economic contraction will prove to be a one off," said Ben May at Capital Economics.

The euro zone economy contracted 0.3 percent in the dying months of 2011 so a second quarter of contraction would meet the technical definition of recession.

A Reuters poll last week suggested the economy will probably wallow in a relatively mild downturn until the second half of this year.

MANUFACTURING MALAISE

The PMI data reinforces the chances that European Central Bank could cut rates to a record low of 0.75 percent next quarter.

The euro zone manufacturing PMI spent its seventh month below the 50 growth mark, barely rising to 49.0 from January's 48.8 and missing expectations for a faster rise to 49.5, while new orders fell for the ninth month.

Although input costs rose again, services firms were forced to cut their prices charged for the third month running, putting that measure of inflation at its lowest since July 2010.

But earlier data from Germany, Europe's biggest economy and the bloc's growth engine, showed growth slowed from last month's seven-month high. It was a similar picture in France.

Private sector firms reduced their work force for the second month running in a bid to cut costs with the composite employment index only nudging up to 49.5 from January's 49.4.

"It is not a great sign. There have been widespread job losses in the periphery, which you would expect. More worryingly there was virtually no job creation going on in France and in Germany the rate of growth has eased quite sharply," Chris Williamson at data provider Markit said.

Euro zone unemployment reached 10.4 percent at the end of last year, its highest since the introduction of the shared currency, official data showed late last month. It is seen peaking at 10.8 percent in the second half of this year. ($1 = 0.6321 British pounds) ($1 = 0.7539 euros)

(Additional reporting by Nick Edwards in Beijing; Editing by Ruth Pitchford/Jeremy Gaunt)

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