Eurozone economic contraction eases

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The pace of the eurozone’s economic contraction eased this month, with Germany’s expanding private sector preventing the region from plunging deeper into recession, according to a closely-watched survey.

Eurozone purchasing managers’ indices rebounded unexpectedly in December for a second consecutive month, suggesting some of the gloom about the region’s prospects had been overdone. Germany saw private sector activity returning to growth.

Economic activity across the 17-country region in the fourth quarter had still contracted sharply, however, with the average index reading in the last three months of 2011 the weakest since the second quarter of 2009.

The indices also failed to dispel fears that the eurozone’s debt crisis and weakened banking system will exacerbate the sharp downturn in much of southern Europe in coming months. Fiscal austerity measures across the continent will act as further brake on growth.

Beyond Germany and France, “the rate of contraction remained steep – the fastest since mid-2009 – and a further slump in business confidence led to another sharp drop in employment,” said Chris Williamson, chief economist at Markit, which produces the survey. The latest eurozone readings were consistent with a 0.6 per cent quarterly contraction in gross domestic product, he estimated.

The purchasing managers’ indices are regarded as up-to-date indicators of trends in economic activity. The composite eurozone index, covering manufacturing and services, rose from 47 in November to 47.9 in December. A figure below 50 indicates a contraction in activity.

Germany’s composite index rose from 49.4 in November to 51.3, powered largely by a pick up in service sector activity.

“We think it would be premature to say that the leading indicators have reached a turning point,” said Ralph Solveen, economist at Commerzbank in Frankfurt. “The most likely scenario…is still that the eurozone economy will contract in the months ahead.” The European Central Bank has forecast a “mild recession” but warned of “substantial downside risks” to the economic outlook.

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