Euro zone index hints at slowing growth

The recovery of the euro zone’s dominant service sector slowed in June, according to a survey that suggested private sector expansion may have already peaked in the second quarter of the year.

Markit said its final Eurozone Services Purchasing Managers' Index of around 2,000 companies, ranging from banks to hotels, fell to 55.5 in June from May’s 33-month high of 56.2, although it was revised up slightly from a preliminary estimate of 55.4.

While still comfortably above the 50-mark that divides growth from contraction, signs of wilting new orders – particularly in No1 economy Germany – could point to a slowdown of growth in forthcoming quarters.

“Question marks over the sustainability of this growth are raised by the marked easing in new business inflows in June, led by falls in new work in both Germany and Spain,” said Markit's chief economist, Chris Williamson.

He pointed to worries about the weakness of the banking sector, government budget deficits and intensifying austerity measures as factors troubling businesses and consumers.

The euro zone services new orders sub-index fell to 52.8 in June from 54.2 in May, dragged down by the German survey which showed new business contracting for the first time since November last year.

Fragile domestic demand in European countries has caused alarm among Washington policymakers.

Before Group of 20 nation summits last month, US Treasury Secretary Timothy Geithner warned European countries not to risk a return to recession by cutting government spending too hard and too fast, echoing comments from US President Barack Obama.

Still, Britain unveiled its toughest budget in a generation in June and German Chancellor Angela Merkel has repeated her commitment to €80 billion  (Dh368bn) of cuts over the next four years.

June’s composite euro zone PMI, which combines the services index and last Thursday's manufacturing index, dipped slightly to 56.0 from 56.4 in May and also showed slowing growth of new orders.

The employment index, which signalled a return to modest jobs growth in private sector firms in May, rose again in June to 50.6 from 50.5.

Euro zone unemployment held steady in May at 10 per cent, backing up the May PMI surveys that showed labour market conditions had stopped deteriorating.

Markit said the average level of the composite activity index during the second quarter of 2010 is consistent with quarterly gross domestic product (GDP) growth of around 0.6 to 0.7 per cent, based on a historical relationship.

Median forecasts from more than 60 economists polled by Reuters two weeks ago said they expected growth of 0.5 per cent in the second quarter.

Like the Reuters poll, the composite PMI overall pointed to slower growth ahead.

“Companies, especially in the periphery, need to regain confidence in the economic outlook if a further slowing in growth and even double-dip recessions for some countries are to be avoided,” said Markit's Williamson.

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