June 5, 2012 / 3:12 PM / 7 years ago

Euro zone in decline, U.S. and China gain

LONDON/NEW YORK (Reuters) - All of the euro zone’s major economies are now in various states of decline, according to business surveys that heaped more pressure on Europe’s leaders to stop the region becoming the center of a new global crisis.

A European Union flag is seen in front of the Parthenon temple in Athens February 21, 2012. REUTERS/John Kolesidis

The latest purchasing managers indexes (PMIs), published on Tuesday, underlined why finance chiefs from the Group of Seven leading industrialized powers held emergency talks on the euro zone’s debt crisis.

The euro zone private sector economy shrank in May at the fastest pace in nearly three years, according to the PMIs, which suggested even Germany is no longer immune to the tremors emanating from the debts of Greece and Spain.

The euro zone set an overwhelmingly dismal tone for the PMIs, which gauge how thousands of businesses across the world fare each month. It overshadowed positive data elsewhere.

The vast U.S. services sector grew at a slightly faster pace last month as a gauge of new orders improved. China’s fledgling services sector expanded at the fastest pace for 19 months. A separate measure of worldwide private sector activity eased slightly in May but managed to grow for a 34th straight month.

The U.S. data “does not suggest that the sector or the overall economy is slipping into a recession, but it does suggest that the economy is settling into a lower growth trajectory,” said Thomas Simons, an economist at Jefferies.

U.S. stocks rose after the data. Treasuries prices dipped. The euro slid after Spain said the euro zone’s fourth-biggest economy was being shut out of credit markets. .N

The G7 meeting had little impact on markets as there was no sign finance chiefs agreed on concrete action to address problems in Spain and Greece. That upped the ante for a European Central Bank policy meeting on Wednesday.

Financial markets are anxious about the risks cascading from a Spanish banking crisis and fret that a Greek election on June 17 could lead Athens to leave the single currency and precipitate yet more economic turbulence.

As European policymakers struggle to contain mounting troubles there, the fallout threatens to drag the world economy into another recession.

After Tuesday’s G7 finance ministers conference call, all eyes are on Wednesday’s ECB meeting, as well as Federal Reserve Chairman Ben Bernanke’s testimony Thursday to the U.S. Congress.

“Until the Greek elections are out of the way, this sort of uncertainty will stay with us. And even after the elections, as they are unlikely to bring a clear-cut decision either way,” said Dirk Schumacher, senior European economist at Goldman Sachs.


Markit’s Eurozone Composite PMI fell to 46.0 in May from April’s 46.7, its lowest reading since June 2009 and its fourth month below the 50 mark that divides growth and contraction. It was little changed from a preliminary reading.

Of particular note was the suggestion Germany is no longer generating the sort of economic growth that kept the wider euro zone out of recession in the first quarter.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield,” said Chris Williamson, chief economist at survey compiler Markit.

German industrial orders on Tuesday added to signs that Europe’s largest economy is heading for a slowdown, falling in April at their fastest rate since November 2011 as orders from abroad dried up.

Elsewhere, business activity in the Brazilian services sector fell in May for the first time since July 2009, reflecting how manufacturers’ persistent woes have started to drag on the main engine of Brazil’s recent economic growth.

Australia’s central bank decided on Tuesday to cut interest rates for a second month running to try to boost confidence in that country. The Bank of Canada, meanwhile, held rates steady and softened its previous hawkish language, in part nodding to the deepening crisis across the Atlantic.


The PMIs have a good record of tracking economic growth and appear to counter predictions from ECB President Mario Draghi for a gradual recovery over the course of the year.

“While the ultimate solution has to be in some form or shape political, the ECB can at least make sure there’s time to come up with a solution. Tomorrow’s ECB meeting will be interesting, to the extent that Draghi will be willing to signal that,” said Schumacher from Goldman Sachs.

Most economists expect it will hold interest rates at their record low 1.0 percent, although a growing minority think it will soon cut them.

The United States has fared far better than its euro zone peers, though three straight months of weak jobs growth has intensified pressure on the Federal Reserve to take even more policy steps to boost the stumbling recovery in the world’s biggest economy.

The Institute for Supply Management said its U.S. services index edged up to 53.7 in May, from 53.5 in April, a touch above economists’ forecasts for it to hold steady at April’s level.

But the employment component fell to its lowest level since November 2011 which, after the disappointing May employment report, added to signs job growth is slowing.

Tuesday’s PMIs showed China’s services industry expanded at its fastest pace for 19 months in May, with new business and optimism about the future robust.

The HSBC China Services PMI rose to 54.7 in May, extending from April’s six-month peak of 54.1. The survey’s compiler, Markit, cited new business growth as the key driver of the index. Services make up about 43 percent of economic activity.

The PMI index also showed that India’s services sector grew at its fastest pace in three months during May.

Editing by Ruth Pitchford, Kenneth Barry and Andrew Hay

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