Last updated: December 5, 2012 5:11 pm

PMIs signal eurozone recession bottoming out

The pace of contraction in the eurozone economy slowed unexpectedly in November, raising hopes that the downturn affecting the 17-country bloc may be bottoming out.

The Markit purchasing managers’ compsite index , a survey of business activity in the manufacturing and services sectors across Europe, rose to 46.5 last month, up from 45.7 in October – and significantly higher than an earlier “flash” estimate for the month.


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Although the latest figure is still below the 50 mark that would signal an end to contraction, a growing number of economists now argue that the worst is over and the economy could turn in the second half of next year. The eurozone fell back into recession in the third quarter for the first time in three years, with gross domestic product contracting 0.1 per cent.

“There are signs that the recession may have reached a nadir ... at least in terms of the rate of decline,” said Chris Williamson, chief economist at Markit.

Positive outcomes could be seen in the data across the board, said Apolline Menut and Francois Cabau at Barclays, but the two London-based economists said they “remain to be convinced” that the trend would continue.

The eurozone is expected to remain in recession until at least early 2013, but Mario Draghi, president of the European Central Bank, said recently that “the recovery for most of the eurozone will certainly begin in the second half of 2013”.

Strong data out of Germany, Europe’s largest economy, and Ireland, which is showing clear signs of resurgence, are fuelling optimism among policymakers and economists.

Germany’s composite PMI figure rose to 49.2 in November from 47.7 in October, reflecting slower declines in both manufacturing and services output. Meanwhile, Ireland’s services PMI remained stable at 56.1, as new orders kept growing last month.

Improved activity in the private sector, which follows a sharp drop in consumer prices and record high unemployment data, is likely to add pressure on the ECB to cut rates at Thursday’s monetary policy meeting. However, most economists expect the ECB will refrain from doing so before it has first tested its recently designed bond-buying programme, which aims to eliminate speculation about a eurozone break-up.

“We expect no rate change, although the decision is unlikely to be unanimous and some governing council members will probably favour a 25 basis points cut,” said Marco Valli, chief eurozone economist at UniCredit.

Unemployment edging closer to 12 per cent remains one of the significant drags on economic recovery in the short term, as consumer demand is set to remain subdued. Moreover, southern European countries seem to be struggling to revive their economies, despite debt levels that have fallen sharply in recent months.

France, Spain and Italy were the worst performers in Wednesday’s PMI data, as companies in the three southern economies continued to suffer from a sharp decline in demand for their goods and services amid the implementation of severe austerity measures.

This led some economists to conclude that the eurozone could enter a phase of no-growth for an indefinite period, similar to that experienced in Japan over the past two decades.

“After a severe margin contraction this year, our new proprietary ‘margin lead indicator’ suggests that European margins will be close to flat next year,” said Graham Secker, European equity strategist at Morgan Stanley.

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