PMI data show eurozone closer to recession

The eurozone moved closer to a recession this month, as private sector economic activity fell back into contraction territory, according to a regional indicator.

The unexpected weakness of the purchasing managers’ indices for the 17-country region highlighted the bloc’s fragility after its debt crisis – especially in crisis-hit southern European members. It increased the risk that there would be a second consecutive fall in gross domestic product in the first three months of the year – meaning a technical recession.

“Although business conditions are showing signs of stabilising so far this year, which represents a marked improvement on the widespread, deepening gloom seen late last year, the eurozone is by no means out of the woods,” said Chris Williamson, chief economist at Markit, which produces the survey.

The indices are watched closely by the European Central Bank as up-to-date indicators of growth trends. Their improvement had boosted hopes that the worst of the slowdown is over, with economic and financial market confidence boosted by the ECB’s injection in December of €489bn in three-year loans into the eurozone banking system. The ECB has kept its main interest rate at a record low of 1 per cent, but not given any indication that further cuts are likely in the coming months.

Even after February’s decline, the indices remained higher than levels seen late in 2011. “Easing financial markets stress and signs of improvement in global demand imply that the necessary conditions for a moderate eurozone recovery remain in place,” said Marco Valli, European economist at UniCredit in Milan.

Eurozone gross domestic product contracted 0.3 per cent in the final three months of last year but the relative strength of the German and French economies, the eurozone’s two largest, has offset the chronic weakness of much of southern Europe. The Bundesbank said this week German economic prospects had “brightened noticeably” recently, boosted by domestic demand as well as export business.

The eurozone “composite” purchasing managers’ index, covering manufacturing and services, rose to 50.4 in January, above the 50 level that divides expansion from contraction for the first time since August. But February’s index showed it falling back to 49.7. The drop was the result of weaker service sector activity, possibly reflecting the impact of fiscal austerity measures on domestic demand. The manufacturing sector index rose slightly between January and February, although it still remained in contraction territory.

The German and French “composite” indices showed private sector activity in both countries continued to expand in February although at a slower pace than in January. Across the rest of the region, activity contracted and at a slightly steeper rate than in January.

Economists took some comfort from signs that the drop in orders reported by eurozone companies was close to turning. Incoming new business fell for the seventh month running, but the rate of deterioration eased for the fourth month in a row to register the smallest drop in demand for six months, Markit said.