Year: 2010

The eurozone’s dominant service sector expanded much slower than expected in December but its manufacturing sector, which led a large part of the economic recovery, grew faster than thought, surveys show.

Worryingly for policymakers, a large part of the strength was on the back of a very positive performance in Germany and a supportive France, which outshone other member states.

“Possibly the divergence is growing wider. Growth in Germany is near a record rate … France has been a strong performer as well as far as PMIs go,” said Chris Williamson at Markit.

“When you strip France and Germany out of the eurozone figures we can see that in December growth of activity across services and manufacturing slowed down almost to stagnation.”

Markit’s Eurozone Flash Services Purchasing Managers’ Index, made up of surveys of around 2,000 businesses ranging from banks to restaurants, slumped to 53.7 in December from November’s 55.4.

The index has now been above the 50.0 mark that divides growth in business activity from contraction since September 2009, but it was well shy of the consensus forecast in a poll for 55.2.

The manufacturing sector saw activity pick up faster than expected, driven by a buoyant Germany and strong new orders.

The flash manufacturing index rose to its highest level since April at 56.8 in December from 55.3 in November, confounding forecasts for a fall to 55.2, while the output index bounced to 57.8 this month from 55.8 in November.

Earlier data from Germany, Europe’s largest economy, showed its service sector slowed more than expected, shy of November’s more than three-year record, but its manufacturing sector expanded much more than predicted.

In neighbouring France both services and manufacturing activity grew at a slower pace than was expected, but Markit said this could be partly due to severe weather and protests over government pension reforms.

The eurozone composite index, made up from the services and manufacturing sectors and often used to predict overall growth, dropped to 55.0 this month from 55.5 in November, missing expectations for 55.4.

Markit said the data pointed to fourth-quarter euro zone growth of 0.5 percent, up from the 0.4 percent growth official figures showed for the third quarter with support from a strong Germany. The economy expanded one percent in the second quarter.

A poll of more than 50 analysts published on Wednesday forecast the economy would grow 0.3 to 0.5 percent per quarter through to the end of 2012.

Optimism, prices rise
While activity may have slowed in the service sector, firms were more optimistic about the longer term outlook, with business expectations rising to 66.5 from 66.3 in November. The index hit a near four-year high of 69.3 in April.

Data showed manufacturers were able to pass on some of the rising raw material costs as the output price index rose to 55.4 in December from November’s 55.2, marking its highest reading since August 2008.

Service sector firms were able to raise prices for the first time since October 2008.

“There is growing evidence that we are seeing a pass-through of cost pressures, certainly among manufacturers. We are finally seeing some improved pricing power in the service sector,” Williamson said.

But companies hired fewer new workers this month, with the composite employment index dipping to 52.3 from November’s 33-month high of 53.1. Manufacturers took on more staff than they have done since July 2007 but this was offset by fewer new hires in the service sector.

Official data showed unemployment in the bloc nudged up to 10.1 percent in October from 10.0 percent in September.

Portugal is under pressure to seek a European bailout due to concerns Lisbon’s debt woes could drag down Spain and trigger an even greater crisis.

The Financial Times Deutschland said some states wanted Portugal to seek aid in order to avoid Spain, the fifth largest EU economy, from having to follow suit.

“If Portugal were to use the fund, it would be good for Spain, because the country is heavily exposed to Portugal,” the FT Deutschland quoted a source in Germany’s finance ministry as saying.

“This news article is completely false, it has no foundation,” said a government spokesman.

A recent Reuters poll shows 34 out of 50 analysts surveyed believe Portugal will be forced to ask for help.

A rescue aimed at meeting Spain’s financing needs for two and a half years would cost €420bn according to a Capital Economics estimate, the lion’s share of the €440bn European Financial Stability Facility (EFSF) reserve set up by the eurozone after the Greece bailout.

But two separate EU funds, augmented with IMF backing, could provide loans worth €750bn in total.

German Bundesbank chief Axel Weber, a powerful member of the ECB’s governing council, said that the EFSF and other EU rescue funds had enough money, if needed, to cover the borrowing needs of stretched euro zone members Greece, Ireland, Portugal and Spain.

Markets are still acutely worried by the threat of debt crises in Greece and Ireland spreading further and have pushed the borrowing costs of Portugal and Spain to record highs.

Top EU officials have stressed that there was no risk of the eurozone breaking up after Ireland caved into pressure and requested a bailout.

Angela Merkel, who unsettled markets by her comment that the euro was in an “exceptionally serious” situation, said she was confident the euro area would emerge stronger from the crisis.

The chairman of eurozone finance ministers, Jean-Claude Juncker said in an interview he was not worried.

And Klaus Regling, chief of the euro’s financial safety net, was even more emphatic when asked by German daily Bild about the risk of the euro area falling apart: “There is zero danger. It is inconceivable that the euro fails.”

Merkel agreed with Nicolas Sarkozy that the mechanism set up to protect the euro should not be changed before it expires in mid-2013 – another attempt to convince spooked investors they would not be made to share the cost of any sovereign default before then.

German proposals for “haircuts” for bond holders have raised peripheral eurozone states’ borrowing costs yet higher.

In another effort to shore up confidence, ECB policymakers brushed off the flare-up in debt market turmoil and said the bank’s plans to scale back its crisis support remained on track.

Greece received a three-year €110bn EU/IMF bailout in May, leading to the creation of the EFSF, which Ireland has now applied to tap to cope with the enormous cost of bailing out its banks.

The Irish government said it was confident it would be able to pass the toughest budget in the country’s history to meet the terms of an EU/IMF rescue under negotiation.

PM Brian Cowen’s €15bn in spending cuts and tax increases unveiled will form the basis for an IMF/EU rescue package worth about €85bn. But the plan failed to impress markets amid doubts the fragile coalition will be able to push it through.