Friday 4 September 2009

Service sectors improve, ECB sees bumpy recovery

Despite some contradictory signals of late, it looks like the UK economy remains on track to recover. From Reuters:

Activity in Britain's services sector grew at its fastest pace in nearly two years in August, boosted by a surge in firms' optimism and reinforcing hopes the economy is pulling out of recession.

The headline business activity index of the CIPS/Markit services Purchasing Managers' Index rose to 54.1 in August from 53.2 in July, the highest since September 2007 and just beating forecasts for a reading of 53.9.

Thursday's survey contrasts with a similar poll earlier this week showing manufacturing activity fell back last month, but the greater weight of the services sector in Britain suggests the economy is well-placed for recovery.

The euro area may also be recovering as a composite index of activity moved above 50 in August. Bloomberg reports:

Europe’s manufacturing and service industries unexpectedly returned to growth in August for the first time in over a year, suggesting the economy is gaining strength.

A composite index of both industries rose to 50.4 from 47 in July, higher than an initial estimate of 50 published on Aug. 21, Markit Economics said today. It also marks the gauge’s first reading above 50, indicating expansion, in 15 months. The index is based on a survey of purchasing managers.

This comes despite the individual sectoral indices remaining below 50.

The services index rose to 49.9 in August from 45.7 in the previous month, today’s report showed. That’s the highest level since May 2008. A gauge of manufacturing increased to 48.2 from 46.3 in July, the highest reading since June 2008.

However, economic recovery may be slow.

Still, a recovery may remain too fragile to encourage companies to add workers. European unemployment rose to 9.5 percent in July, the highest since 1999. Retail sales declined 1.8 percent in July from a year earlier after falling 2 percent in the previous month, the European Union’s statistics office in Luxembourg said today.

Certainly, the ECB sees a difficult recovery. Again from Bloomberg:

European Central Bank President Jean-Claude Trichet said the euro region’s recovery from recession will be “bumpy” and signaled officials are in no rush to withdraw emergency stimulus measures.

While latest data suggest “the significant contraction in economic activity has come to an end,” the recovery “is expected to be rather uneven,” Trichet said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at a record low of 1 percent. “It isn’t time to exit” policies designed to boost growth, he said...

The ECB today raised its economic forecasts for the 16- nation euro region to predict growth of about 0.2 in 2010 instead of a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago.

The ECB expects inflation to average 0.4 percent this year and 1.2 percent in 2010, up from 0.3 percent and 1 percent forecast in June. That is still below the bank’s goal of keeping annual price gains just below 2 percent.

In the US, service activity is still contracting, but at a slower pace. Bloomberg reports:

Service industries that make up most of the U.S. economy shrank at a slower pace last month, further evidence that the worst recession since the 1930s is ending.

The Institute for Supply Management’s index of non- manufacturing businesses rose to 48.4, the highest level in 11 months, from 46.4 in July, according to the Tempe, Arizona- based group. Readings below 50 signal contraction in industries that account for 90 percent of the world’s largest economy.

In a sign that the economy is nevertheless slowly recovering, initial claims for unemployment benefits fell last week albeit by less than expected.

First-time applications for jobless benefits fell by 4,000 to 570,000 in the week ended Aug. 29, exceeding the 564,000 median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed. The total number of people collecting unemployment insurance climbed.

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