Euro zone business growth ground to a halt

06 February 2019 | Economics

Jonathan Cable - Euro zone businesses expanded at their weakest rate since mid-2013 at the start of the year as demand fell for the first time in four years, with a manufacturing slowdown spreading to services, a survey showed yesterday.

Forward-looking indicators in the downbeat survey also suggested there will not be any turnaround soon. That will make disappointing reading for policymakers at the European Central Bank, who recently ended their more than 2.6 trillion euro asset purchase stimulus programme.

IHS Markit's Euro Zone Composite Final Purchasing Managers' Index (PMI), considered a good measure of overall economic health, dipped to 51.0 from December's 51.1, its lowest reading since July 2013.

While that was higher than an earlier flash reading of 50.7, it was barely above the 50 mark that separates growth from contraction.

"It does suggest the euro zone economy has been weakening for a while now and the anticipated rebound in activity is not really happening," said Peter Dixon at Commerzbank.

"On the whole, we are operating in very low gear and it suggests the ECB is not going to be in any position to tighten policy for some time to come."

Retail sales in the euro zone fell as expected in December, dragged down by the steepest decline in shopping in Germany in 11 years, official data showed yesterday. That reinforced the sense of an economy slowing at the close of the year.

Individual PMI surveys showed while German activity accelerated, it looked tenuous. France's composite reading sank to 48.2, its lowest in over four years.

Britain flatlines

Across the channel, another PMI showed Britain's giant services industry is suffering and risks stalling or contracting as Brexit nears and the global economy slows.

Services firms reported job cuts for the first time in six years amid falling orders, according to the survey which suggested Britain's economy is flat-lining after losing momentum late last year.

The PMI for the euro zone's services industry held steady at December's 51.2, which was its lowest reading since November 2014. Growth in factory activity was minimal in January, a sister survey showed on Friday.

IHS Markit said the composite PMI pointed to first-quarter economic growth of just 0.1% across the 19 countries that use the euro, much slower than the 0.4% predicted in a Reuters poll last month.

Worryingly, some of that scant growth came from firms running down backlogs for a second month as demand fell. An overall new business index sank to 49.5 from 50.7, its first sub-50 reading since November 2014.

In further signs of a slowdown, services firms increased headcount at the slowest rate since late 2016. The employment index dropped to 52.3 from 53.6 in December.

"All in all, it is likely this is not a one-off. It's part of a trend that has been in place for some time and it's kind of difficult to see how we turn around from here," said Dixon. – Nampa/Reuters

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