Dec 04, 2014

    Euro zone economy looks set to contract next year


    THE euro zone economy may face another contraction after business activity grew less than expected in November despite heavy discounting, surveys yesterday showed, although Asian readings were more upbeat.

    Firms across the euro zone cut prices again. That, and signs that the bloc's core economies are struggling, will concern the European Central Bank (ECB) which has launched a raft of measures to revive growth and drive up dangerously low inflation.

    In contrast, a survey covering China's services industry showed slightly faster expansion. But after data on Monday said manufacturing growth was its weakest in at least six months, it may not be enough to allay concerns about a softening economy.

    "There are clear downside risks to various areas of the world economy including the euro zone and to some extent, China,"said Philip Shaw, chief economist at Investec. "The euro zone numbers do indicate the economy is moving forward, but at a snail's pace, (and) the pressure remains on the ECB."

    Markit's final November Composite Purchasing Managers' Index (PMI), based on surveys of thousands of companies across the euro area and seen as a good indicator of growth, sank to 51.1 from October's 52.1, missing an earlier flash reading of 51.4.

    Last month was the 17th month the index has been above the 50 level that separates growth from contraction. But the new business index fell below that mark for the first time since the middle of last year, suggesting a further downturn this month.

    "The region is on course to see a mere 0.1 per cent gross domestic product growth in the final quarter of the year, with a strong likelihood of the near-stagnation turning to renewed contraction in the new year unless demand shows signs of reviving," said Chris Williamson, Markit's chief economist.

    China's official non-manufacturing PMI rose to 53.9 last month from 53.8 while a separate services PMI published by HSBC/Markit inched up to 53.0 last month from October's 52.9, as new orders rose at their quickest pace in 2.5 years.

    But the surveys painted a mixed picture of the labour market, which Chinese leaders say is a crucial consideration when setting policy. Along with Monday's news, that prompted some economists to predict China would cut interest rates again in the coming months after doing so unexpectedly on Nov 21.

    In other upbeat data from the region, activity in India's services industry expanded at its fastest rate in five months, although the outlook was clouded by tumbling confidence.