Euro zone in deep downturn as China, US show revival

Written by Reuters | London | Updated: Nov 23 2012, 09:22am hrs
The euro zone economy is on course for its deepest downturn since early 2009, while Chinese factories returned to growth last month bringing better news for the world economy, business surveys showed on Thursday.

The latest purchasing managers indexes (PMIs), which survey thousands of companies all over the world, at least suggested the global economic slowdown is not getting worse, despite the prolonged downturn in Europe.

The US index, released on Wednesday because of the Thanksgiving holiday, showed manufacturing growing at its quickest pace in five months.

Chinas vast manufacturing sector, meanwhile, expanded for the first time in 13 months.

Still, Europe looks set to remain the major drag on the world economy next year. It re-entered recession in the third quarter, and this quarter seems unlikely to bring any respite.

While factory data in the euro zone also surpassed expectations, there was a worrying decline in its services sector, comprising the banks, hotels and restaurants that make up most of its economy.

PMI compiler Markit said the surveys were consistent with the euro zone economy shrinking 0.5% this quarter, which would be the worst reading since the first quarter of 2009, when the economy hit its lowest ebb during the financial crisis.

Looking ahead, we still think... the improvement in the global economy, as signaled by the further pickup in the Chinese PMI, will provide some respite to the euro zone economy, said Martin van Vliet, economist from ING.

But that could be some way off. The weak PMI outturn for November is a major disappointment in light of the increases in the German and French PMI surveys, and suggest the recession on the euro zones periphery is gathering further pace.

German business activity shrank for a seventh straight month in November, dragged down by services firms, while the French PMI signalled the risk of a sharp economic contraction taking place this quarter.

The euro zone's periphery countries such as Spain, Portugal and Greece have laboured under severe austerity policies that have deepened their recessions and sparked popular unrest.

A reminder that the euro zones sovereign debt crisis has further to run came on Wednesday, as international lenders failed for the second week to reach a deal for emergency aid for Greece.

Still, Spain managed to sell nearly 4 billion euros with ease at auction on Thursday, kicking off its funding programme for a daunting 2013.

Markits flash euro zone services PMI fell to 45.7 this month, its lowest reading since July 2009 and failing to meet the expectations of economists who thought it would hold at Octobers 46.0.

It has been rooted below the 50 mark that divides growth and contraction for 10 months now, and survey compiler Markit said it was consistent with a 0.5% economic contraction this quarter.

To a large extent, global growth next year will depend on Chinas ability to overcome its downturn, after a disappointing 2012.