Euro zone may skirt recession as PMIs surprise

LONDON Tue Jan 24, 2012 12:19pm GMT

A woman walks past closed retail units in Manchester, northern England December 7, 2011. REUTERS/Danish Siddiqui

A woman walks past closed retail units in Manchester, northern England December 7, 2011.

Credit: Reuters/Danish Siddiqui

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LONDON (Reuters) - The euro zone may escape recession thanks to a surprise upturn in the service sector this month but the overall economy is still struggling to gain any traction outside Germany and to a lesser extent France, surveys showed on Tuesday.

Markit's Flash Eurozone Purchasing Managers' Composite Index (PMI), a reliable indicator of overall economic performance, showed the euro zone economy grew in January for the first time since August, confounding forecasts for a contraction.

Survey compiler Markit said that if sustained, the data pointed to no growth in the first quarter - but no contraction either.

Germany's service sector expanded at its fastest pace in seven months in January - far quicker than expected - while manufacturing business grew for the first time in four months, according to a PMI survey.

France's service sector grew at its fastest pace since August, but manufacturing shrank for the sixth straight month. Business activity also contracted across the rest of the 17-member bloc, where demand has been hit by tough austerity measures and waning confidence as the region struggled to contain its debt crisis.

The euro zone composite PMI, jumped to 50.4 from 48.3 in December, its highest in four months, and breaking above the 50 level that marks growth in activity.

The reading easily beat the highest forecast of 49.5 in a Reuters poll and a median prediction of 48.5.

"The numbers are very encouraging. We're just seeing more and more evidence that ... things in the euro zone, or at the very least in the core, are bottoming out," said Alan Clarke, economist at Scotiabank.

A Reuters poll last week predicted the euro zone would be mired in a mild recession until the second half of this year, shrinking by around 0.3 percent for 2012 as a whole.

While Tuesday's data suggests the economy is doing slightly better than expected it is still very weak outside the core.

"They beat expectations, but the manufacturing sector appears to be contracting and services is broadly flat," said Peter Dixon at Commerzbank.

"What this seems to be telling us is that the economy is struggling to gain any traction outside of Germany."

Some of the growth in activity this month clearly was spurred by fulfilling old orders. The composite backlogs of work sub-index remained below 50 at 47.2, but up slightly from 46.4 in December.

Firms were also forced to cut prices for the second month to drum up business, despite rising input costs.

OPTIMISTIC OUTCOME

The sovereign debt crisis that began in Greece over two years ago rages on, threatening to rip the currency union apart.

Euro zone finance ministers on Monday rejected an offer made by private bondholders to help restructure Greece's debts, sending negotiators back to the drawing board and raising the threat of a disorderly Greek default.

The euro zone has also been hurt by slowing economic growth in some of its major export markets.

Even German's big exporters are feeling the pressure with Siemens, Europe's biggest engineering conglomerate and a bellwether for the region, reporting an unexpectedly sharp fall in core profits on Tuesday and warning that 2012 would be a difficult year.

The European Central Bank is expected to cut its official interest rate from a record low of 1 percent, having taken measures to ease banks' funding strains in an effort to spur growth and relieve pressure from the debt crisis.

Services firms, ranging from banks to hotels, grew more optimistic about the future this month with the business expectations index jumping to 56.0 from December's 53.6, the highest reading since August.

The euro zone services PMI rose to 50.5 this month from 48.8 in December, the first time it has been above the 50 mark that divides growth from contraction since last August, and beating both the consensus of 49.0 and the highest forecast of 50.0 in a Reuters poll.

The euro zone manufacturing PMI came in at 48.7, above December's 46.9 and also beating both the top-end forecast and a median prediction for 47.3 in a Reuters poll.

The figures showed that factories took on a few extra workers this month but service sector firms cut staff.

Official data showed the unemployment rate held steady at 10.3 percent in November but a Reuters poll predicts it will rise this year.

(Editing by Susan Fenton)

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