December 16, 2010 / 10:47 AM / 9 years ago

UPDATE 1-Two-speed euro recovery more entrenched -PMIs

* PMIs show German, French growth; near stagnation elsewhere

* Data points to 0.5 percent Q4 euro zone GDP growth

* Service sector grows at slower pace this month

* Manufacturing sector growth accelerates

* For Insider show click on link.reuters.com/hus32r

(Adds details, analyst views, market reaction)

By Jonathan Cable

LONDON, Dec 16 (Reuters) - Europe’s two-speed recovery is becoming more entrenched, with Germany’s private sector powering ahead and France making headway while the rest of the euro zone is close to running out of steam, surveys showed on Thursday.

In a parallel pattern, the bloc’s dominant service sector expanded much more slowly than expected this month but its manufacturing sector — which led a large part of the economic recovery — grew faster than thought, according to purchasing managers indexes.

“There is a two-speed recovery with a periphery that is struggling. If you take the usual suspects the clear message is that they are in a contractionary or sluggish growth environment while the core countries are improving,” said Silvio Peruzzo at RBS.

Survey compiler Markit said that outside of the euro zone’s top two economies, the growth picture was grim.

“Possibly the divergence is growing wider. Growth in Germany is near a record rate ... France has been a strong performer as well as far as PMIs go,” said Chris Williamson at Markit.

“When you strip France and Germany ... we can see that in December growth of activity across services and manufacturing slowed down almost to stagnation.”

Official figures from Ireland due at 1100 GMT are expected to show its economy stagnated in the third quarter, while Greek numbers showed unemployment in the country rose in the same period.

Markit’s Eurozone Flash Services Purchasing Managers’ Index, made up of surveys of around 2,000 businesses ranging from banks to restaurants, slumped to 53.7 in December from November’s 55.4.

The index has now been above the 50.0 mark that divides growth in business activity from contraction since September 2009, but it was well shy of the consensus forecast in a Reuters poll for 55.2. Markets showed little reaction to the data.

WINTER FREEZE

The manufacturing sector saw activity pick up faster than expected this month, driven by a buoyant Germany and strong new orders.

The flash manufacturing index rose to its highest level since April at 56.8 in December from 55.3 in November, confounding forecasts for a fall to 55.2, while the output index bounced to 57.8 this month from 55.8 in November.

Earlier data from Germany, Europe’s largest economy, showed its service sector slowed more than expected, shy of November’s more than three-year record, but its manufacturing sector expanded much more than predicted.

In neighbouring France both services and manufacturing activity grew at a slower pace than was expected, but Markit said this could be partly due to severe weather and protests over government pension reforms.

The euro zone composite index, compiled from the services and manufacturing sectors and often used to predict overall growth, dropped to 55.0 this month from 55.5 in November, missing expectations for 55.4.

Markit said the data pointed to fourth-quarter euro zone growth of 0.5 percent, up from the 0.4 percent official figures showed for the third quarter with support from a strong Germany. The economy expanded 1.0 percent in the second quarter.

A Reuters poll of more than 50 analysts published on Wednesday forecast the economy would grow 0.3 to 0.5 percent per quarter through to the end of 2012. [ECILT/EU]

“December’s euro zone PMI surveys point to a reasonably solid gain in GDP in the last quarter of the year,” said Jonathan Loynes at Capital Economics.

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For a graphic click on r.reuters.com/sev42r

OPTIMISM, PRICES RISE

While activity may have slowed in the service sector, firms were more optimistic about the longer term outlook, with business expectations rising to 66.5 this month from 66.3 in November. The index hit a near four-year high of 69.3 in April.

Data showed manufacturers were able to pass on some of the rising raw material costs as the output price index rose to 55.4 this month from November’s 55.2, marking its highest reading since August 2008.

Service sector firms were able to raise prices for the first time since October 2008.

“There is growing evidence that we are seeing a pass-through of cost pressures, certainly among manufacturers. We are finally seeing some improved pricing power in the service sector,” said Markit’s Williamson.

Data released on Thursday showed euro zone inflation was at 1.9 percent in November.

But companies hired fewer new workers this month, with the composite employment index dipping to 52.3 from November’s 33-month high of 53.1. Manufacturers took on more staff than they have done since July 2007 but this was offset by fewer new hires in the service sector.

Official data released late last month showed unemployment in the bloc nudged up to 10.1 percent in October from 10.0 percent in September.

(For economists’ views see [ID:nSLAFNE6KL])

(For foreign exchange reaction click on [FRX/] and [USD/])

(For bond market reaction click on [GVD/EUR])

(For a guide to all PMI indices <PMI/INDEX1>)

Editing by John Stonestreet

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