June 5, 2012 / 3:13 PM / 6 years ago

Euro zone in decline, U.S. and China gain

LONDON/NEW YORK (Reuters) - All of the euro zone’s major economies are now in various states of decline, according to business surveys that heaped more pressure on Europe’s leaders to stop the region becoming the center of a new global crisis.

The latest purchasing managers indexes (PMIs), published on Tuesday, underlined why finance chiefs from the Group of Seven leading industrialized powers held emergency talks on the euro zone’s debt crisis.

They agreed to work together to address pressing problems in Spain and Greece, Japan’s Finance Minister Jun Azumi said.

The euro private sector economy shrank in May at the fastest pace in nearly three years, according to the PMIs, which suggested even Germany is no longer immune to the tremors emanating from the debts of Greece and Spain.

But the vast U.S. services sector grew at a slightly faster pace last month as a gauge of new orders improved, and China’s fledgling services sector expanded at the fastest pace for 19 months.

The U.S. “data held up but is still at a low level and I do not think this counters the significantly weak data we have been seeing,” said Tom Porcelli, chief economist at RBC Capital Markets in New York.

U.S. stocks edged higher immediately after the data before trimming gains, while Treasuries prices increased losses and the dollar gained against the yen.

But the euro zone set an overwhelmingly dismal tone for the PMIs, which gauge how thousands of businesses across the world fare each month.

Financial markets are anxious about the risks cascading from a Spanish banking crisis and fret that a Greek election on June 17 could lead Athens to leave the single currency and precipitate yet more economic turbulence.

“Until the Greek elections are out of the way, this sort of uncertainty will stay with us. And even after the elections, as they are unlikely to bring a clear-cut decision either way,” said Dirk Schumacher, senior European economist at Goldman Sachs.

Markit’s Eurozone Composite PMI fell to 46.0 in May from April’s 46.7, its lowest reading since June 2009 and its fourth month below the 50 mark that divides growth and contraction. It was little changed from a preliminary reading.

Schumacher said while the PMIs are not showing a big decline in euro zone gross domestic product as yet, they suggest it might shrink modestly in the second quarter after stagnating in the first quarter.

Of particular note was the suggestion Germany is no longer generating the sort of economic growth that kept the wider euro zone out of recession in the first quarter, with businesses taking a mild downturn last month.

“Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield,” said Chris Williamson, chief economist at survey compiler Markit.

German industrial orders on Tuesday added to signs that Europe’s largest economy is heading for a slowdown, falling in April at their fastest rate since November 2011 as orders from abroad dried up.

Elsewhere, business activity in the Brazilian services sector fell in May for the first time since July 2009, reflecting how manufacturers’ persistent woes have started to drag on the main engine of Brazil’s recent economic growth.

Australia’s central bank decided on Tuesday to cut interest rates for a second month running to try to boost confidence in that country.


The PMIs have a good record of tracking economic growth and appear to counter predictions from European Central Bank President Mario Draghi for a gradual recovery over the course of the year.

“While the ultimate solution has to be in some form or shape political, the ECB can at least make sure there’s time to come up with a solution. Tomorrow’s ECB meeting will be interesting, to the extent that Draghi will be willing to signal that,” said Schumacher from Goldman Sachs.

Most economists expect it will hold interest rates at their record low 1.0 percent, although a growing minority think it will cut them soon. Whether the ECB board will be influenced by the G7 finance chiefs remains to be seen.

The United States has fared far better than its euro zone peers, although some recent economic data - particularly for employment - has disappointed economists.

Three straight months of weak jobs growth has intensified pressure on the Federal Reserve to take even more policy steps to boost the stumbling recovery in the world’s biggest economy.

Fed Chairman Ben Bernanke is scheduled to testify on the economy before a congressional committee on Thursday.

The Institute for Supply Management said its U.S. services index edged up to 53.7 in May, from 53.5 in April, a touch above economists’ forecasts for it to hold steady at April’s level. A reading above 50 indicates expansion in the sector.

Tuesday’s PMIs showed China’s services industry expanded at its fastest pace for 19 months in May, with new business and optimism about the future robust.

The HSBC China Services PMI rose to 54.7 in May, extending from April’s six-month peak of 54.1. The survey’s compiler, Markit, cited new business growth as the key driver of the index. Services make up about 43 percent of economic activity.

The PMI index also showed that India’s services sector grew at its fastest pace in three months during May.

Editing by Ruth Pitchford and Kenneth Barry

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