Eurozone recovery stumbles further as business growth eases in August

21st August 2014

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Pressure is mounting on European policymakers to undertake new measures to reignite the Eurozone’s ailing economy as new numbers show business activity in the region fell back once again in August.

Economic growth in the troubled region went nowhere in the three months to the end of June and now the latest Markit Flash Eurozone Composite Output Index, which measures business activity in the private sector has come in below consensus forecasts at 52.8 in August, its lowest level this year and down from 53.8 in July.

On a more positive note, the headline index has kept its head above the neutral 50 mark for 14 successive months.

Jennifer McKeown senior European economist at research firm Capital Economics said: “August’s fall in the Eurozone composite PMI was the fourth in six months, adding to signs that the region’s feeble recovery is already over.

“Admittedly, the PMI is still consistent on past form with positive euro-zone GDP growth of about 0.3% per quarter. This would be an improvement on the second quarter’s stagnation and at least suggests that the economy is not back in recession.”

The fall was felt most in the manufacturing sector, where the output index dropped from 52.7 to 50.9, leaving it consistent with barely positive growth. “This might suggest that the Russia-Ukraine crisis is having a greater impact on manufacturing activity than direct trade links alone would imply.” added McKeown.

The services sector index posted a more modest decline, from 54.2 to 53.5. The price indices of the PMI added to the evidence of deflationary pressure in the region and the economy-wide output price index dropped from 49.0 to 48.9, leaving it below the “no-change” level of 50 for the 29 consecutive month. The input prices index fell too, although it remains above 50.

Markit’s survey found that the ongoing subdued and fragile nature of the upturn in economic activity remains too weak to encourage companies to take on staff in sufficiently large numbers to have a meaningful impact on unemployment as August saw job creation slow to near-stagnation.

“This survey will add to the pressure on the ECB to do more to support the flagging Eurozone economy, even while other major central banks start to move in the opposite direction,” said McKeown.

Rob Dobson, senior economist at Markit said: “With the PMI Output Index slipping slightly to 52.8, the region remains on course to register growth of only around 0.3%-0.4% in the third quarter, a level that is unlikely to stimulate any real turnaround in the labour market.”

“The muted rate of expansion and stalling labour market recovery will keep already-watchful eyes on the ECB for any signals that the ground is being softened for further supportive measures. However, it is most likely that policy makers will allow recent stimulus efforts to have a greater chance to filter through to the real economy before making any further moves.”

Just over two years have passed since European Central Bank (ECB) president Mario Draghi, pledged to do ‘whatever it takes’ to safeguard the eurozone from collapse. But since then the euro has been strengthened against the US dollar, taking away its competitive edge while the region is in danger of falling into a period of deflation, given that inflation registered a mere 0.4% in July.

ECB policymakers have already introduced a number of radical measures in a bid to boost its economy. In June it not only slashed its benchmark interest rate to 0.15% but took its deposit rate for banks into negative territory, at -0.1%.

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