Eurozone business contraction easing

June 23, 2009
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, BRUSSELS, Jun 23 – Business contraction in the 16 countries using the euro was the shallowest for nine months in June despite a steep decline in the service sector, a survey showed on Tuesday.

The eurozone\’s purchasing managers\’ index (PMI), compiled by data and research group Markit, rose to 44.4 points in June from 44.0 points in May, according to a first estimate, fuelling hopes that the recession may be bottoming out.

However the latest figures remain firmly below the boom-bust line of 50 points — a score below 50 indicates a contraction — for a 13th consecutive month in the recession-hit eurozone economy.

"The good news" is that the survey "showed overall improvement for a fourth month running," said Howard Archer, chief European economist at IHS Global Insight.

"The bad news is that the rate of improvement slowed appreciably in June as the services sector suffered a modest relapse and that the surveys still pointed overall to significantly contracting activity," he added.

"The figures are consistent with eurozone gross domestic product (GDP) falling by 0.5-0.6 percent in the second quarter," said Chris Williamson, Chief Economist at Markit.

While rising unemployment has hit demand, particularly in the service sector, "prospects remain positive, however, as confidence in the services economy is the most buoyant for almost two years while manufacturers look set to rebuild inventories in coming months," he added.

Companies continued to cut jobs for a 12th consecutive month, but the rate of job losses slowed for the second month in a row from April’s record high.

Unemployment in the 16-nation eurozone rose to 9.2 percent of the workforce in April, the highest level this decade as the recession hit consumers and industry.

The latest headcount reduction was the smallest since January.

The service sector PMI fell to 44.5 in June from 44.8 in May. However that fall was wiped out in the overall figure by a rise from 40.7 to 42.4 in the manufacturing PMI.

Looking ahead, the survey predicted that the rate of decline in output will continue to ease in coming months.

In manufacturing, the new orders to inventory ratio, which acts as a reliable indicator of future production trends, rose sharply to a 19-month high.

Also expectations of activity in the service sector a year from now rose to a 23-month peak.

Carsten Brzeski at ING Financial Markets was upbeat.
"The recession in the eurozone is easing," he said.

"The survey results add to recent evidence that the worst may be behind and that the eurozone economy is stabilising."

However he cautioned that there was "no reason for overhasty enthusiasm" with the real economic data still disappointing and indicators well below their historical averages.

Archer echoed that "eurozone economic recovery is far from guaranteed, and relapses remain a very serious danger."

Consequently the European Central Bank (ECB) must not rule out taking further efforts to boost economic activity, he said.

The ECB this month held to its record low key interest rate of 1.0 percent and most analysts expect it to keep it there for some time.

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