Eurozone Downturn Continues at Start of Q3 2012
The Eurozone economy remained in a downturn at the start of Q3 2012.
At 46.5 in July, little-changed from 46.4 in June, the Markit Eurozone PMI® Composite Output Index signalled a contraction in output for the tenth time in the past 11 months. The headline index came in slightly above the earlier flash estimate of 46.4.
Manufacturers and service providers both reported lower levels of output in July. The downturn was more severe in manufacturing, where production contracted at the fastest pace since May 2009. Service sector business activity fell for the sixth month running, though the rate of decline eased to its weakest since March.
The output of the combined manufacturing and service sectors contracted in each of the big-four nations in July. The worst performers by far were Italy and Spain. The rate of contraction in France slowed marginally, while the downturn in Germany was the steepest for over three years.
Broad stagnations in the service sectors of both Germany and France failed to offset sharp drops in manufacturing production. Ireland was the only brighter spot, with overall output rising for the second month running.
Chris Williamson, Chief Economist at Markit said: “The final PMI data for July confirm the message from the earlier flash estimate that the Eurozone continued to contract at a quarterly rate of approximately 0.6% in July, suggesting the region looks set for a second consecutive quarterly decline.
“With incoming new business falling at the fastest rate for three years and service sector companies becoming the gloomiest about the outlook since early-2009, there seems little prospect of any improvement soon.
”Some consolation can be gained from the fact that the steep rates of contraction in Italy and Spain are at least showing signs of bottoming out. Ireland also brings hope that the periphery can return to growth, with Irish firms reporting a second consecutive month of very modest growth.
The big worry, however, is that the downturn in Germany may be becoming more entrenched, suggesting that the largest euro economies are seeing convergence in collective and mutually-reinforcing decline.”
The downturn in Eurozone output reflected falling demand for goods and services. The level of incoming new work contracted to the greatest degree since June 2009, and at a sharper rate than signalled by the earlier flash estimate.
Steep declines were seen at both manufacturers and service providers. Spare capacity also remained available, as highlighted by the sharpest drop in backlogs of work for three years.
The combination of available spare capacity and the ongoing weakness of demand led to further job losses in July. Employment fell for the seventh month running, with the rate of job losses the sharpest since January 2010 (but slightly weaker than signalled by the flash estimate).
Spain saw the steepest cut in payroll numbers, with the pace of decline one of the fastest seen over the past two-and-a-half years. Widespread job cutting was also reported in France and Italy, with rates of decline hitting 30- and 3-month records respectively. Employment fell only slightly in Germany and Ireland, however, following modest increases in June.
The rate of input cost inflation eased to a 32-month low in July. This mainly reflected a steep drop in manufacturers’ purchase prices on the back of lower costs for commodities and energy. In contrast, service sector input prices rose for the thirty-second successive month.
The rate of decline in average output charges was the sharpest for almost two-and-a-half years, with manufacturers and service providers both reporting lower selling prices.
Declines were also signalled in all of the nations covered by the survey. Spain reported the steepest price discounting by far. Germany saw a modest decline for the first time since August 2010.
The Markit Eurozone Services Business Activity Index rose to a four-month high of 47.9 in July, above the earlier flash estimate of 47.6. The index nonetheless remained at a level consistent with a sixth straight month of contraction and a steep rate of decline by the historical standards of the survey.
The worst performers were Italy and Spain, which both saw steep contractions in business activity. Ireland posted a modest decline. Better news came from Germany and France, with services activity in Germany edging higher and France stabilising after the contraction seen throughout the second quarter.
New business placed at service providers fell at the sharpest pace in three years in July, as companies faced ongoing business and consumer uncertainty. The outlook for service sector activity dropped to its lowest since March 2009, with companies expecting no growth of business activity over the coming year.
The mood about the year ahead grew gloomier in all of the four largest euro nations, with Italy and Spain seeing particularly sharp drops in confidence. In contrast, business optimism in Ireland improved slightly.
Service sector payroll numbers were cut for the seventh straight month, with the rate of job losses hitting a three-month record. The steepest reduction was signalled by Spain, while cuts were also implemented in France, Italy and Ireland. German service providers bucked this trend by raising staffing levels for the third month in a row.
Average input price inflation ticked slightly higher in July, after easing in each of the prior three months. Meanwhile, strong competition and weak demand led to further discounting of service charges.
Average selling prices declined for the eighth month running, with the rate of deflation unchanged compared to June (which was the fastest since February 2010).
Spain reported by far the steepest drop in prices charged. Declines were also seen in the other nations covered by the survey, including a slight decrease in Germany for the first time in ten months.