Business

Euro zone seen back in recession, Asia resilient

September 06, 2012

China’s Premier Wen Jiabao (front R) shows the way to German Chancellor Angela Merkel during an official welcoming ceremony at the Great Hall of the People in Beijing, August 30, 2012. Merkel makes her second trip to China in half a year this week, hoping to strengthen booming trade ties and obtain assurances from Beijing that it will support the fragile euro zone by buying the bonds of its stricken southern members. ― Reuters picChina’s Premier Wen Jiabao (front R) shows the way to German Chancellor Angela Merkel during an official welcoming ceremony at the Great Hall of the People in Beijing, August 30, 2012. Merkel makes her second trip to China in half a year this week, hoping to strengthen booming trade ties and obtain assurances from Beijing that it will support the fragile euro zone by buying the bonds of its stricken southern members. ― Reuters picSINGAPORE, Sept 6 ― The euro zone probably slipped back into recession in the current quarter, according to business surveys yesterday that also showed Asia’s services sector growth remained muted in August as the global economy struggled to get its footing.

The Purchasing Managers’ Index (PMI) for the euro zone, published by Markit, showed the economic rot that began in smaller periphery members of the 17-nation bloc is now taking hold even in Germany, its largest and strongest economy.

“There is very little in the overall euro zone PMIs to suggest an imminent recovery. The figures are consistent with the economy returning to a technical recession,” said Philip Shaw at Investec.

“The overall levels of growth implied by the PMIs in Asia are stronger but it is pretty clear that the Asian economies are catching a cold from the economic woes being suffered elsewhere.”

A Reuters poll published last month predicted the euro zone would contract 0.2 per cent in the three months to September but Markit said the PMIs suggested the downturn could be far worse, shrinking by 0.5-0.6 per cent.

The euro zone economy shrank 0.2 per cent in the three months to June, according to official data. A second quarter of contraction would meet the technical definition of recession.

August’s euro zone composite PMI, which measures manufacturing and services together, fell to 46.3, revised down from a flash reading of 46.6 and below July’s 46.5.

It was pulled down by a fall in Germany’s composite PMI to 47.0, its lowest reading since June 2009 when the euro zone was in the middle of the worst recession since World War Two.

While the situation in Europe remains dire, survey data from Britain released on Tuesday provided some respite. Its services sector posted unexpectedly strong PMI numbers, a sign the country may be crawling out of recession.

Ireland’s services sector grew for the first time in four months in August, a PMI survey showed yesterday, as a rise in new business at home and abroad offered some shelter from a slump in the rest of the euro zone.

But with downbeat PMI surveys from Italy, France and Germany, investors are anxious to see if the European Central Bank will adopt more drastic measures at its policy meeting today to help alleviate the crisis in the region and reduce crippling borrowing costs in Spain and Italy.

The sovereign debt crisis which began in the euro zone’s smaller economies is now hammering business and consumer confidence worldwide, putting pressure on policymakers to take radical steps to help.

With the crisis in the euro zone showing little sign of easing, hopes of a quick turnaround in China’s fortunes are fast fading, with many forecasting its economy to remain weak well into the third quarter and possibly beyond.

Fragile China

China’s services PMI index fell to 52.0 in August, a one-year low but still showing growth. In India, services business grew at its fastest pace in six months with the index at 55.0.

“Broadly speaking we still see Asia as quite resilient. Asia overall still benefits from quite strong fundamentals. It also has, in many cases, policy room to counter external headwinds,” said Leif Eskesen, chief India and ASEAN economist at HSBC.“In China’s case this is something that will help prop up growth. More importantly, domestic sources of growth are generally quite strong within the region.”

The People’s Bank of China cut interest rates in June and July and has been injecting cash into money markets to ease credit conditions, as calls for the central bank to do more to support the economy grow louder.

Any dramatic stimulus measures by Beijing are unlikely, as policymakers are wary of reigniting inflation in the property market and broader economy.

Manufacturing PMI surveys this week painted a gloomier picture, revealing a spreading contraction in Asia’s factory sector as new export orders fell in the region.

In the euro zone, manufacturing business contracted faster than previously thought, with core countries failing to provide any support as the downturn swept across the 17-nation bloc. ― Reuters

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