Eurozone Sees Steepest Contraction Since June 2009 Despite Downturn Easing in Germany

Steven Bobson, Europe & Americas Editor
September 23, 2012 /

The Markit Eurozone PMI Composite Output Index fell from 46.3 in August to 45.9 in September, according to the preliminary ‘flash’ reading, based on around 85% of usual monthly replies. The index therefore signalled that the private sector economy contracted for the twelfth time in the past 13 months, with the rate of decline accelerating slightly to reach the fastest since June 2009.

The September reading rounds of the weakest quarter since the second quarter of 2009, with the average PMI reading for the third quarter at 46.2, down from an average of 46.4 in the second quarter.

Manufacturing and services saw similarly steep rates of decline in September. However, while manufacturing output fell at the slowest rate since April, the service sector saw the largest drop in activity
since July 2009.

The faster rate of decline in output reflected an accelerated rate of loss of new business – the largest
monthly fall since May 2009. Manufacturing and services saw identical, steep rates of contraction, with the decline in services the largest since June 2009.

Manufacturers reported a drop of marginally greater magnitude than in August, though new export orders fell at a slightly slower rate.

The falls in production and new orders were widespread across the single currency area, although a divergence was seen among the region’s two largest economies.

France saw output and new orders both fall at the fastest rates since April 2009, with rates of decline
accelerating markedly in both manufacturing and services.

Germany meanwhile saw the rate at which output fell ease substantially to show only a modest decline, and
the weakest since output began contracting in May.

The rate of loss of new orders also eased. Services even saw a marginal upturn in activity for the first time
since May, though the manufacturing sector continued to contract, led by a further sharp fall in new export orders.

Outside of France and Germany, the region saw output fall at the steepest rate since May 2009, with the rate of loss of new orders also accelerating.

Employment fell for the ninth consecutive month across the Eurozone, dropping at the fastest rate since January 2010. The rate of job losses in services was the highest since November 2009 and steeper than the cut seen in manufacturing, which was the lowest for five months.

While only a marginal fall in employment was seen in Germany, French payroll numbers were cut at the fastest rate since November 2009, and elsewhere across the region employment showed the largest monthly fall since July 2009.

Backlogs of orders fell across the region at the fastest rate since July 2009, falling at stronger rates in both manufacturing and services and suggesting employers may seek further job cuts in October unless demand revives.

Service providers’ views on the 12-month outlook also deteriorated, becoming the most downbeat since March 2009. Steep falls in confidence were seen in both Germany and France, with a further deterioration also seen across the rest of the region as a whole.

The September surveys also found an increase in price pressures. Input costs rose that the fastest rate since April, driven higher by rising oil, fuel and food prices in particular. Manufacturers’ input costs and
selling prices both rose for the first time in four months. However, although input costs in the service
sector showed the largest rise for six months, prices charged fell at the fastest rate since February 2010,
attributable to the weakness of demand.

Chris Williamson, Chief Economist at Markit said: “The Eurozone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years. The flash PMI is consistent with GDP contracting by 0.6% in the third quarter and sending the region back into a technical recession.

”We had hoped that the news regarding the ECB’s intervention to alleviate the debt crisis would have lifted business confidence, but instead sentiment appears to have taken a turn for the worse, with businesses the most gloomy since early-2009 due to ongoing headwinds from slower global growth. This gloom is clearly reflected in headcounts falling at the fastest rate since January 2010 as companies seek to adjust to weaker demand.

“At the same time, input costs have risen markedly, linked largely to higher oil prices. Weak demand has meant companies have been unable to pass these costs on to customers, meaning output prices fell again in September. The combination of higher costs and lower selling prices will inevitably hit profit margins.

“Some good news came from an easing in the rate of contraction in Germany, though the rate of decline accelerated markedly in France and a deepening downturn was also evident in the periphery. It remains too early to say, however, whether Germany will continue to buck the trend, especially as it continued to see a strong rate of loss of new orders in both manufacturing and services.”


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