Crisis-hit eurozone may tumble into recession

Updated: 2012-02-27 08:04

By Jonathan Cable (China Daily)

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LONDON - The eurozone economy is in danger of tipping into recession, with the services sector shrinking this month along with manufacturing, tempering a wave of optimism after a new bailout deal for Greece was struck last week.

Surveys of purchasing managers published on Wednesday showed unexpectedly weak activity in Germany, the region's most powerful economy, and in France.

This is in addition to problems in the bloc's ailing debtor states, such as Spain, where unemployment is running at 23 percent, and Greece, where the region's debt crisis began more than two years ago and where continuous cuts have provoked riots.

The Markit Eurozone Composite Flash PMI, a leading indicator of overall economic growth, fell to 49.7 in February from 50.4 last month. The figure was lower than the anticipated rise to 50.6 and below the 50 mark that divides growth from contraction.

That weakness was echoed in China, where the PMI showed export orders falling to their worst performance in eight months. Europe is China's biggest export market.

Older data published on Wednesday, the official figures on eurozone industrial orders for December, showed there had been some stabilization at low levels. Manufacturing orders in the 17 countries that share the euro rose 1.9 percent on the month, beating the 0.7 percent predicted in a Reuters poll and reversing a 1.1 percent fall in November.

But with the euro crisis curtailing British business with the bloc, two Bank of England policymakers voted for an even bigger stimulus in February than the extra 50 billion pounds ($79 billion) that their colleagues have agreed to pump into the economy, according to the minutes of the BOE's meeting on Feb 8 and 9.

Several economists said the eurozone PMI reports suggested no growth in the current quarter, reigniting concerns about a mild recession after a raft of more upbeat data in recent weeks.

"The economy remains stuck in low gear," said Peter Dixon at Commerzbank AG. "It's indicative of a flatlining economy, maybe slightly contracting rather than a major slowdown. It doesn't bode well for the first quarter."

The latest eurozone data were collected largely before the bloc's finance ministers agreed a bailout of 130 billion euros ($172 billion) for Greece in the early hours of Feb 21.

But while that buys time to stabilize the currency bloc, deep doubts remain about Greece's ability to emerge from its economic slump and to avoid default in the longer term.

The PMIs showed the eurozone's two biggest economies, Germany and France, are struggling to grow, even as the gap between them and the struggling periphery widens.

February's eurozone services PMI fell to 49.4 from January's 50.4, missing even the lowest forecast in a Reuters poll of 44 economists whose predictions centered on a rise to 50.6.

"(It) puts a bit of a dent in hopes that the fourth quarter's economic contraction will prove to be a one-off," said Ben May at Capital Economics.

The eurozone economy contracted 0.3 percent in the dying months of 2011, so a second quarter of contraction would meet the technical definition of recession.

A recent Reuters poll suggested the economy will probably be stuck in a relatively mild downturn until the second half of this year.

The PMI data reinforces the chances that the European Central Bank could cut rates to a record low of 0.75 percent in the next quarter.

The eurozone manufacturing PMI spent its seventh month below the 50 growth mark, barely rising to 49.0 from January's 48.8 and missing expectations for a faster rise to 49.5, while new orders fell for the ninth month.