Euro zone faces deepest downturn since early 2009

LONDON Thu Nov 22, 2012 6:59pm EST

An employee of German car manufacturer Mercedes Benz works on a Mercedes B-class car at the Mercedes plant in Rastatt July 16, 2012. REUTERS/Alex Domanski

An employee of German car manufacturer Mercedes Benz works on a Mercedes B-class car at the Mercedes plant in Rastatt July 16, 2012.

Credit: Reuters/Alex Domanski

LONDON (Reuters) - The euro zone economy is on course for its weakest quarter since the dark days of early 2009, according to business surveys that showed companies toiling against shrinking order books in November.

Service sector firms like banks and hotels that comprise the bulk of the economy fared particularly badly this month, and laid off staff at a faster pace.

While the monthly rate of decline that manufacturers reported eased far more than economists anticipated, Markit's latest Purchasing Managers' Indexes (PMIs) pointed to little change overall for a recession-hit euro zone this month.

The flash service sector PMI fell to 45.7 this month, its lowest reading since July 2009, the survey showed on Thursday, failing to meet the expectations of economists who thought it would hold at October's 46.0.

It has been rooted below the 50 mark that divides growth and contraction for 10 months now, and survey compiler Markit said it was too soon to say if this marked the nadir.

With more austerity on the way, and a reminder of the festering sovereign debt crisis in this week's failure of lenders to agree more aid for Greece, prospects for next year look ominous.

"The concern about the outlook is getting worse as we move towards the end of the year," said Chris Williamson, chief economist from Markit.

He added that German companies especially have become more pessimistic about the year ahead.

"If the domestic economy of Germany, the largest euro zone nation, is weakening, then that bodes ill for the rest of the region, especially as there's little trade picking up outside the region."

Overall, the PMIs were consistent with the economy shrinking around 0.5 percent in this quarter, Markit said.

That would be the sharpest contraction since the first quarter of 2009.

While they also suggested the economy shrank by a similar amount in the third quarter, instead of 0.1 percent shown in last week's official data, Williamson said it was very likely the fourth quarter would see a larger downturn.

"The factors that were helping to prop up the official data in the third quarter won't be apparent in the final quarter of the year. So you are going to see a deterioration in those official numbers."

Economists pointed to stronger industrial production data early in July and August as a reason why the euro zone economy did not contract as badly as many feared in the third quarter.

PESSIMISM PREVAILS

There was little conviction among businesses that things will get better soon.

Service sector companies are now more pessimistic about the year ahead than at any time since March 2009, when the expectations index last plumbed 48.6 and the region was in the midst of its worst post-war recession.

The manufacturing PMI edged up to 46.2, its best showing since March, from 45.4 in October. That was better than even the most optimistic forecast for 46.0, from 40 economists polled by Reuters.

Similarly, the factory output and new orders indexes crept higher, but still signalled steep rates of decline.

The composite PMI, which groups together the services and manufacturing survey, pointed to an almost unchanged rate of decline for the economy in November, rising to 45.8 from 45.7 in October.

It also showed inflation pressures are easing quickly for companies, as both output and input prices indexes dropped.

Economists polled by Reuters remain divided over whether the European Central Bank will cut its main refinancing rate from 0.75 percent to a new record low 0.5 percent.

"I think the ECB consider their policy to be suitably accommodative at the moment and will continue to put the ball in the court of national governments to work on structural issues," said Williamson.

Detailed PMI data are only available under license from Markit and customers need to apply to Markit for a license. To subscribe to the full data, click on the link below: http://www/markit.com/information/register/reuters-pmi-subscriptions For further information, please phone Markit on +44 20 7260 2454 or email economics@markit.com

(Editing by Hugh Lawson)

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Comments (6)
Foxdrake_360 wrote:
This isn’t working. They must know this.

It’s obvious to everyone that Greece should have defaulted 2 years ago. It should have received NO bailout, and declared bankruptcy. The “creditors” needed to get screwed. Not to hurt them out of malice but as a consequence of the inherent risk of operating in the market. Mind you, these “creditors” are the same people who privatize gains but socialize losses.

Greece needed to act in the interest of Greece. It would have collapsed. It would have been painful and perhaps, Spain and Ireland would have followed but France and Germany would have been fine. Italy is debatable.

But then something miraculous would have happened. Free of debt, free of the restrains or shackles of entitlements, and perhaps with a better structured tax system, Greece would have stabilized.

And with stability (in both the society and the market) business would have resumed. Moreover, with a steady revenue stream, it might have been able to restore some benefits to the old and truly needy and begin investing in infrastructure to improve quality of life and other economic efficiencies.

When Greece came out, the rest would have followed suit, Portugal, Spain, Ireland, Italy and with their economies on the mend the slow down (but not collapse) in France and Germany would have ended as new bottles of Champagne and new Mercedes shipped south.

Unfortunately, the financial system is so corrupt, that the interests of a rich few always supersede the interest of 99% of us.

Nov 22, 2012 5:48am EST  --  Report as abuse
reality-again wrote:
The euro is a currency that was initially created as means to facilitate, and eventually bring about the unification of Europe.
It didn’t.
Instead, this tool is now warping the European economy, and it has contributed to the creation of an unsustainable system, and downward-spiraling economic situation.
When a tool becomes that dysfunctional, it needs to be discarded.
The sooner Europe gets rid of this experimental currency, the better chance its member countries will have to successfully tackle the other serious problems that warp the playing field against competitiveness and growth in half of the euro zone, and are already starting to affect the better performing half.

Nov 22, 2012 8:27am EST  --  Report as abuse
ONQ wrote:
A lot of blame is laid at the door of the Euro for unsustainable cheap lending through unmonitored and regulated banking organizations masquerading at mortgage facilities. Add to the the usual suspects protecting their vested interests and you go not have a level playing field. Bondholders who took risks are being bailed out by taxpayers who sought certainty. Something stinks to high heaven.

The fact remains there are two simple ways to make ends meet. Cut costs and increase income. Doing only one of these never works – there is no compensating investment for the jobs inevitably lost. The rich are not playing their part. The banks are criminally dysfunctional. But there is a wider picture here, once which degrades those without mobility and undermines the social context of those forced to move elsewhere to follow the work.

The process of Globalization has resulted in the undermining of middle class jobs in many countries and their export to what had previously been considered third world economies. This move was at the behest of and the betterment of the corporatocracies, in their endless quest to cut labour costs. These fools persist in seeing themselves as top of the heap, when in face they are part of the system.

Ford, when he was producing motor cars, knew this. He paid his workers enough to be able to afford them. Now the selective cost reductions in certain products may reduce their price to countries that used to produce and consume them. But the exporting of jobs reduce people’s ability to pay overall.

The myth of “profit” as a “reward for risk” must be exposed for the self-serving aggrandizement within a cartel system that it obviously is, and the need for corporations to view themselves as part of a sustainable system needs to be hammered home for the benefits governments and electorates alike. They say corporations have personhood now. So does a sociopathic criminal, but that doesn’t mean you allow him dictate the destiny of the world economy. Although in the case of the American President, that just might be the case. In the meantime, the system is doing what the system was designed to to. Make the rich richer. Outrageously so.

Finally we come down to it. We need to monitor, regulate, and tax the banks. We need to invest these monies in infrastructural projects to revitalize our economies. Unless we do this, we will not see our economies recover in this generation.

We are the 99%. We are not anonymous. Do not expect us – we are already here. And we are not leaving until we have back what was once ours. A living. A wage. A career. You’ve been warned.

Nov 22, 2012 11:31am EST  --  Report as abuse
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