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Euro zone business growth dries up in January

Written by Business World, on 24th Jan 2019. Posted in EU

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Business growth in the euro zone all but stalled at the start of 2019 as consumer uncertainty, trade tensions and political woes meant incoming new work fell for the first time in over four years, a survey found.

The slowdown has spread across both the services and manufacturing industries, with factory activity in Germany, the bloc's powerhouse, also contracting for the first time in more than four years.

Thursday's euro zone survey will make disappointing reading for policymakers at the European Central Bank who have only just drawn a line under their more than 2.6 trillion euro asset purchase program that was supposed to support growth.

They are predicted to leave interest rates on hold later on Thursday and expectations for when they will start tightening monetary policy were pushed out in a Reuters poll last week as the likelihood of a recession has risen.

When asked, only 36 of 65 economists polled said they were confident the ECB would be able to raise interest rates at all before the next downturn.

IHS Markit's Flash Composite Purchasing Managers' Index sank to 50.7, its weakest since July 2013, from a final December reading of 51.1, below even the most pessimistic forecast in a Reuters poll where the median expectation was for a modest rise to 51.4.

That was only just above the 50 mark that separates growth from contraction and IHS Markit said the PMI pointed to first quarter economic growth of fractionally below 0.1 percent. Last week's Reuters poll forecast a 0.4 percent expansion.

"Today's euro area PMIs confirm the weakness seen last year extended into 2019. Hopes of a quick rebound in economic activity are unrealistic and the ECB may soon be forced to consider new stimulus measures," said Jan von Gerich at Nordea.

"However, we remain optimistic that the second half of this year will be better. If we are wrong and a rebound does not materialize, any expectations of ECB rate hikes can be forgotten and replaced with ideas about how to provide more easing."

The euro staged a retreat while stocks and bonds rallied after the painful data from France and only modestly better readings from Germany set the tone for the ECB's first meeting of the year.

Manufacturing activity in Germany, Europe's largest economy, contracted for the first time in more than four years last month. Worryingly, IHS Markit warned that weakness could soon spread to the service industry which has been supporting overall growth.

Trade tensions have hit exporters in Germany which posted its weakest growth rate in five years last year - just 1.5 percent compared with 2.2 percent in 2017.

Protests in France, concern around Britain's imminent departure from the European Union, a potential technical recession in Italy and the ongoing U.S.-China trade war have caused businesses and consumers to be cautious.

There was a small uptick in consumer confidence this month, official data showed on Wednesday, but it remains muted.

French business activity fell unexpectedly this month, pulling back at the fastest rate in over four years in the face of weakening demand and the impact of anti-government protests.

"The weak PMI was heavily influenced by France again. In Germany, manufacturing did not get the bounce back that was eagerly awaited either," said Bert Colijn at ING.

"A weak growth rate for the euro zone seems to be in the making for Q1 and questions about how temporary this slowdown is are becoming more prominent."

Suggesting there will be little turnaround anytime soon, an index measuring new business growth across the euro zone fell below the breakeven mark for the first time since late-2014.

It has been a similarly disappointing month for the bloc's dominant service industry, with the flash PMI index falling to a near 5-1/2 year low. This pushed firms to cut back on hiring.

Adding to the gloomy picture, factories started the year with meager growth too, with a manufacturing PMI sinking to a more than four-year low in January. (Reuters)

Source: www.businessworld.ie

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