Thursday, 6 October 2011

Eurozone economy looks headed for contraction

European stocks jumped on Wednesday, with the STOXX Europe 600 Index rising 3.1 percent, even as economic data suggest that the euro area may be headed for a recession.

Markit's eurozone services purchasing managers' index fell to 48.8 last month from 51.5 in August, its lowest reading since July 2009 and below an earlier flash reading of 49.1. The composite PMI fell to 49.1 from 50.7 in August, also its lowest level since July 2009.

Chris Williamson, chief economist at Markit, said that the steep drop in new business in particular "suggests that GDP will contract in the fourth quarter unless business and consumer confidence rally in coming weeks".

Another indication of a weak eurozone economy on Wednesday was a report that showed that retail sales fell 0.3 percent in August.

Elsewhere in Europe, though, the UK services sector performed better in September, the Markit/CIPS services purchasing managers' index rising to 52.9 in September from 51.1 in August. However, second quarter growth for the UK has been revised down to 0.1 percent from 0.2 percent.

The services sector also continued to expand in the US, albeit at a slower pace, as the Institute for Supply Management's non-manufacturing index fell to 53.0 in September from 53.3 in August. Also expanding last month was private employment, which increased by 91,000 according to ADP Employer Services.

The performance of the global economy, however, will depend a lot on actions taken to resolve the European sovereign debt crisis. The IMF has urged Europe to pump as much as 200 billion euros into its banks but German leader Angela Merkel says that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue.

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