Euro zone private sector contraction deepens in May: PMI

LONDON Thu May 24, 2012 4:07am EDT

LONDON (Reuters) - The euro zone's private sector has sunk further into the doldrums this month as new orders shrivel, forcing firms to run down backlogs and slash workforces, key business surveys showed on Thursday.

And worryingly for policymakers, a downturn that started in smaller periphery members is taking root in the core countries of Germany and France, whose tepid growth had been keeping the troubled bloc afloat.

"Weakening manufacturing output brought the German economy at large into mild contraction for the first time since last November," said Tim Moore, senior economist at data compiler Markit.

The euro zone composite PMI, a combination of the services and manufacturing indexes and seen as a guide to growth, fell to 45.9 this month from April's 46.7, its lowest reading since June 2009.

"The survey is broadly consistent with gross domestic product falling by at least 0.5 percent across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany," said Chris Williamson, chief economist at Markit.

Official data showed the euro area narrowly escaped recession by stagnating in the first quarter, supported by strong growth in Germany. But a Reuters poll taken last week predicts a 0.1 percent contraction in the current quarter.

The euro zone's services and manufacturing sectors both saw activity decline at a faster pace than expected despite firms cutting prices to drum up business, according to flash readings of Markit's Purchasing Managers' Indexes (PMI).

This month's flash PMI for the dominant service sector fell to 46.5 from April's 46.9, a seven-month low and missing expectations for 46.9. May is the fourth month the index has been below the 50 line that divides growth from contraction.

Manufacturers painted a similarly gloomy picture, with a PMI reading of 45.0, the lowest since June 2009 when the bloc was mired in recession and below both last month's 45.9 and a forecast for 46.0.

The output index for the sector, which drove a large part of the bloc's recovery from the last recession, sank to 44.7 from 46.1.

CORE CRUMBLING

Earlier PMI data from Germany, Europe's largest economy, showed its manufacturing sector contracted at a far greater pace than was expected while its service sector saw only tepid growth.

In neighboring France, both sectors contracted faster than predicted by most economists.

"(French) PMI data point firmly towards a contraction in second-quarter GDP following stagnation in Q1," said Jack Kennedy, senior economist at Markit.

And things are unlikely to improve anytime soon as the new business index for the euro zone service sector fell to 45.3 this month from April's 45.4, matching October's 27-month low. That comes despite firms cutting prices charged in all but one of the past nine months.

A similar dearth of new work for factories meant they were forced to run down existing orders, with the backlogs sub-index falling to 45.4 from April's 46.0.

As business has tailed off firms have cut workforces, keeping the composite employment index firmly below the break-even mark at 48.3, albeit slightly above April's 48.1.

The euro zone unemployment rate hit 10.9 percent in March, equaling a record high of 15 years ago, and a Reuters poll showed it peaking at 11.4 percent towards the end of this year, or the start of next year.

(Editing by Hugh Lawson)

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