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September 2011

09/22/2011

Eurokrise: Sid Harth

September 22, 2011 10:24 am

PMI signals eurozone on brink of recession

By Ralph Atkins in Frankfurt

The eurozone economy is on the brink of recession, according to a closely-watched survey showing private sector activity contracted this month for the first time in more than two years.

The worse-than-expected deterioration in eurozone purchasing managers’ indices adds to evidence that the region’s recovery has gone into reverse. It increases pressure on the European Central Bank to cut interest rates.

Economic prospects have been hit by sharp falls in consumer and business confidence amid the escalating eurozone debt crisis, as well as fiscal austerity measures across the continent and gloom about US growth.

Adding to the gloom, eurozone new industrial orders tumbled by 2.1 per cent in July compared with the previous month – suggesting production would also slow in coming months. June saw a 1.2 per cent fall, according to Eurostat.

Jean-Claude Trichet has signalled an interest rate cut is possible at the ECB’s governing council meeting on October 6 in Berlin – his last as ECB president - even though the main policy rate was raised to 1.5 per cent as recently as July.

An alternative way of lowering market interest rates would be to cut the rate the ECB pays on funds that banks are parking in increasingly large volumes with it overnight. Use of the ECB deposit facility exceeded €120bn on Wednesday night.

The ECB could also take steps to boost further the supply of liquidity to eurozone banks – its equivalent of “quantitative easing” - or relax requirements on collateral banks need to provide when obtaining liquidity.

Christoph Weil, economist at Commerzbank in Frankfurt, said forward-looking eurozone economic indicators were “dropping like a stone” and a recession was “dangerously close”.

However, he warned that “the hurdle for a rate cut – increasingly expected by the market – is high.” ECB governing council members worry that such a sharp reversal in ECB monetary policy could add to economic instability.

The “composite” purchasing managers’ index, covering services and manufacturing, dropped from 50.7 in August to 49.2 in September, falling below the 50 level which divides expansion from contraction for the first time since July 2009.

With the index regarded as a reliable indicator of growth trends, the latest readings suggested Germany and France – the eurozone’s two largest economies – had seen growth almost stagnating in September, according to Markit, which produces the survey.

“The rest of the eurozone saw the steepest contraction for over two years.” said Chris Williamson, Markit’s chief economist.

Germany’s slowdown has worried economists because of its economy’s role as Europe’s industrial powerhouse. However, the Bundesbank has warned against over-exaggerating the pessimism. Its economists expect German economic growth to have rebounded in the third quarter after an exceptionally weak performance in the previous three months.

That would counter some of the gloom about eurozone prospects and strengthen the case for the ECB waiting before cutting official borrowing costs.

Nevertheless, Andreas Dombret, a Bundesbank director, warned on Wednesday that the “downside” risks to growth prospects over the winter months had “increased significantly”.

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