December 14, 2012 12:15 pm

Eurozone contraction slows in December

The rate at which eurozone economic activity is contracting eased in December, initial readings from a leading business survey said on Friday, offering hope that the currency union could escape recession and return to low growth late next year.

A “flash” estimate of Markit’s composite eurozone Purchasing Managers’ Index rose to 47.3 – still well inside contraction territory indicated by readings of less than 50, but the highest level it has been in nine months.

An upturn in Germany’s service sector – which pushed Germany’s composite PMI to 50.5 in December, giving it the first positive reading in eight months – was the main positive factor. While the French composite PMI managed a slight improvement to 45, up from 44.3 in November, the survey reported the sharpest fall in new business in France since March 2009.

The mix of signals – other data released on Friday showed annual eurozone inflation falling to 2.2 per cent in November from 2.5 per cent in October but also a 0.2 percentage point drop in employment – comes as the European Central Bank has struck a cautiously optimistic tone and held off from cutting its main interest rate of 0.75 per cent, which is already at a record low.

“We think that our very accommodative monetary policy stance will find its way into the economy in the coming months,” Mario Draghi, president of the ECB, told the Financial Times in an interview this week. “That’s why we’re saying that we may see a recovery in the second part of the year.”

With inflation expected to keep falling and remain within the ECB’s target of close to, but below 2 per cent over the medium term, the central bank may worry about a lack of growth but has no formal need to stimulate it.

“The PMIs show that tough austerity, the short-term impact of structural reforms and difficult financing conditions in the [eurozone] periphery weigh on domestic demand in these countries as well as export prospects elsewhere,” Christian Shulz, economist at Berenberg Bank said in a note.

In his interview, Mr Draghi argued that the structural reforms to boost competitiveness taking place across Europe were beginning to bear fruit, but that austerity also had a role to play in cutting budget deficits.

“Let’s not forget that the reason why fiscal consolidation became central for the policy advice of the ECB is because one can’t have systems built on debt and deficits that the financial crisis has shown to be unsustainable,” he said.

Germany’s Bundesbank joined in the lightly positive tone, tweeting a link to its November monthly report giving an analysis of current account deficits that shows marked improvement in those eurozone countries that have either been bailed out or come close to needing help.

Most forecasters expect eurozone gross domestic product to contract in the fourth quarter, an analysis borne out by the PMI readings.

Chris Williamson, chief economist at Markit, noted that the gradual turnround was being led by Germany – in spite of weakness in its December manufacturing PMI readings – but added: “The rates of decline in France and the rest of the region remain worryingly severe.”

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