Business Activity Contracts Sharply in the Euro Zone

[image]European Pressphoto Agency

German manufacturing data suggest further economic woes. Volkswagen workers, above, assembled a vehicle at a Hannover plant in March.

Business activity in the euro zone contracted sharply in June, a closely watched survey showed, underscoring the currency bloc’s deepening economic malaise as it confronts an escalating debt crisis along its southern fringe.

A pronounced drop in German manufacturing activity raised fears that the region’s largest economy, and primary financial backer, is beginning to buckle from the region’s debt crisis. The euro’s recent slide, which helped boost exports in German and other economies two years ago, is unlikely to provide much support now, economists and business leaders said.

“Things were better than expected in the first quarter…but [orders] seemed to stop in the last two or three months,” with weakness extending from Europe’s weak periphery to faster-growing emerging markets such as China, said Ralph Wiechers, chief economist at VDMA, Germany’s engineering association. “We are very cautious about the next few months.”

The euro-zone purchasing managers’ index was 46 in June, unchanged from May’s three-year low and well below the break-even threshold of 50 between expansion and contraction, according to data-services firm Markit, which compiles the figures based on a survey of purchasing executives.

The figures “reinforce the belief that the euro zone suffered renewed, appreciable [gross domestic product] contraction in the second quarter,” said Howard Archer, economist at consultancy IHS Global Insight. The 17-country bloc stagnated in the first quarter despite strong growth in Germany.

Germany’s PMI, which includes both manufacturing and services, slid 0.8 point to 48.5, suggesting the economy will struggle to grow this quarter. Manufacturing activity slid deeper into contraction, with that index falling below 45. A particular concern: New export business fell at its fastest pace in more than three years. France’s PMI also remained below 50, at 46.7.

In addition to weakness in the euro zone, Chinese exports have stopped growing and exports to India are in slight decline, said Mr. Wiechers.

The hope in Germany is that record-low unemployment and high savings will spur consumer spending and offset some effects of the global slowdown. A housing boom in cities such as Berlin and Munich, aided by low interest rates, should also support growth, analysts say.

Thursday’s PMI report only included details for France and Germany; other countries will report their June results in early July. But debt-saddled countries such as Portugal and Spain are showing no signs of stabilization after several quarters of contraction.

 
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