September 20, 2012 / 10:04 AM / 6 years ago

Euro zone business decline grinds on despite ECB action - PMI

LONDON (Reuters) - The European Central Bank’s aggressive new bond-buying plan has so far failed to inspire any major improvement in business at ailing euro zone companies, unexpectedly gloomy surveys showed on Thursday.

A Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt September 6, 2012. REUTERS/Alex Domanski

The downturn in activity in the euro zone’s service sector steepened this month at the fastest pace since July 2009, Markit’s purchasing managers indexes (PMIs) showed, with French companies performing particularly poorly.

A good indicator of economic performance, the euro zone services PMI fell to 46.0 in September from 47.2 in August, below even the most pessimistic forecast of 46.5 in a Reuters poll of nearly 40 economists.

A number below 50 denotes contracting activity.

The services sector figure came despite a surprise upturn in the related German surveys, suggesting smaller euro zone economies like Spain and Italy have performed especially poorly this month, boosting the case for an ECB interest rate cut in October.

And there was little sign that the ECB’s plan to buy the debt of troubled euro zone states, announced on September 6, has boosted confidence among service sector firms — at least so far.

“We were hoping the ECB announcement of the intervention in the bond market, if Spain and Italy applied for help, would have helped lift business confidence, but that doesn’t seem to have been the case,” said Chris Williamson, chief economist at survey compiler Markit.

“Rather than lift higher, the service sector confidence indicator fell to its lowest since March 2009. That is a very downbeat assessment of where companies think the economy is going to go in the next 12 months.”

Williamson said it may be the case it is simply too early for the ECB’s bond buying programme, aimed at ending the debt crisis, to have lifted confidence among companies.

Markit said the PMIs over the third quarter have been consistent with a roughly 0.6 percent decline in gross domestic product, worse than the 0.2 percent drop suggested by the latest Reuters poll of economists.

The composite PMI, which combines the manufacturing and services survey, fell to 45.9 from 46.3 — again missing the lowest forecast, which was for 46.0.

It showed job losses increasing at the fastest pace since January 2010, suggesting the euro zone’s record unemployment rate of 11.2 percent in June is unlikely to head lower soon.

Euro zone factories performed better than forecast this month, but only because they showed a slower rate of decline. The manufacturing PMI rose to 46.0 from 45.1 in August.

Still, there was no improvement in order books needed to propel an imminent return to growth. The new orders index slipped to 43.6 from 43.7.

“Overall order books and inventory signals are such that it seems manufacturing output is still going to decline in the fourth quarter,” said Williamson.

“We may see an easing in the rate of decline, but it’s still going to be quite a severe downturn.”


The German PMIs showed an unexpectedly strong improvement, as service companies in the euro zone’s biggest economy returned to very modest growth this month.

Indeed, both the manufacturing and service sector PMIs for Germany came in above the cheeriest predictions from nearly 30 economists.

“Whether or not that will last is the big question. We’re not altogether hopeful about that,” said Markit’s Williamson.

The main reason for doubt may be France, which experienced an unwelcome and sharp worsening of business conditions.

In an unfortunate mirror image of Germany, both its services and manufacturing PMIs fell short of the lowest forecasts from around 20 economists.

“We can see now from these numbers that France is really starting to struggle quite substantially now. Its economy is suffering, its neighbours are seeing demand weaken,” said Williamson.

Such a dour economic outlook will probably boost expectations among economists that the ECB will cut its main refinancing rate from 0.75 percent to a new record low 0.5 percent in October, as suggested in the last poll of economists.

Governing Council member Luc Coene said on Monday the ECB could cut its main interest rate and even put its deposit rate into negative territory, warning Spain’s borrowing costs could soar again.

Editing by Ross Finley and Hugh Lawson

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