Euro zone business activity stabilises in August

LONDON - Business activity in the euro zone unexpectedly stabilised at weak levels in August, while the plunge in crude oil eased inflationary pressure, bolstering the view that interest rates will stay on hold for now.

By (Reuters)

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Published: Thu 21 Aug 2008, 6:22 PM

Last updated: Sun 5 Apr 2015, 11:55 AM

The August Flash Eurozone PMI data from RBS/Markit published on Thursday were all better than expected, although they pointed to an ongoing deterioration in business and employment and depict an economy in clear decline from recent boom times.

Separate figures for the 15-member bloc's two largest economies, Germany and France, however, were not as good and kept alive fears of recession in the euro area this year.

Economists said whether or not the euro zone economy will contract in the current quarter following a 0.2 percent shrinkage in Q2 -- the first outright contraction since monetary union -- is on a knife's edge.

"There is a good chance of a recession," said Dominic Bryant, economist at BNP Paribas, after the figures were released. "It's a close call as to whether it will be avoided."

RBS/Markit said the Flash Eurozone Services PMI edged down to 48.2 in August from 48.3, the lowest since June 2003 but above the 48.0 consensus forecast. The equivalent manufacturing PMI unexpectedly edged up, as did the composite PMI.

A number below 50 generally denotes contraction but the private industry survey data, which cover everything from factory output to professional services like haircuts, are at levels consistent with no growth in the broader economy.

"The PMIs are not arguing for a decline in gross domestic product in the third quarter," said Jacques Cailloux, chief euro area economist at survey sponsor RBS on a teleconference, adding that the figures looked like "a carbon copy" of the July report.

As such, they may be welcomed by the European Central Bank in that they do not show an acceleration in the pace of deterioration while at the same time provide clear evidence of both cost and charge inflation rates tapering off.

"I'm not sure the numbers are going to shift sentiment at the ECB," said Matthew Sharratt at Bank of America, adding: "They are not dire enough."

The ECB is widely expected to leave rates on hold at 4.25 percent for the rest of this year, waiting for inflation to abate from near record highs before cutting in 2009.

Financial markets did not react much. The euro ticked up slightly against the dollar, which was already in broad retreat before the figures were released.

One worrying development was a fall in the services jobs index to 49.2, the lowest since early 2004. RBS's Cailloux noted this move was consistent with continued rises in the euro zone unemployment rate, currently at 7.3 percent.

These figures may herald the beginning of a slip in euro zone inflation, currently at double the ECB's preferred 2.0 percent ceiling.

The ECB raised rates by a quarter point to 4.25 percent last month, in part as a warning that it was ready to act tough in the face of official data showing the highest inflation rate at any time since monetary union.

But the report showed a sharp slowing in the rate of increase in prices services sector companies charge to their customers, with that index tumbling to a six-month low of 52.2 in August from 54.5 in July.

The input prices index also fell sharply, to 62.0 from 65.2 as crude oil prices fell some $35 a barrel.

The services sector jobs index slipped, but new business stabilised at the lowest level since the run-up to the Iraq war in early 2003 while expectations for the future turned up.

Euro zone manufacturing showed even clearer signs of stabilising, with the output index up nearly a full point to 47.6 in August from 46.7 in July and the jobs index rising as well as the new export orders index -- albeit showing a slowing pace of contraction rather than outright growth.

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