7/31/2014

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Survey shows European recovery slowing further

Survey shows European recovery slowing further
People queue to enter a government unemployment office in Madrid, Spain.
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LONDON (AP) - Further evidence emerged Thursday to show that the economic recovery in the 17-country eurozone is already losing steam, just months after it emerged from its longest-ever recession.

Financial information company Markit said its purchasing managers' index - a gauge of business activity - fell in November to a three-month low of 51.5 points from 51.9 the previous month. The fall was unexpected - most economists had been predicting a modest rise to around 52.

Even though the index remained above the 50 mark that indicates expansion for the fifth month running, the surprise decline adds to the recent weight of evidence suggesting that the eurozone recovery is not gaining traction.

Figures last week showed that the eurozone economy only grew 0.1 percent in the third quarter from the previous three-month period, down on the second quarter's 0.3 percent advance.

Though details from many individual countries have yet to be collected, Thursday's survey did point to starkly different conditions across the region. While France lagged, Germany's growth appears to be gaining momentum.

It also showed a worrisome drop in prices, an indication demand is weak.

"Prices charged for goods and services fell at a faster rate in November, despite firms' input costs rising at the steepest clip for over a year," said Markit's chief economist Chris Williamson.

A drop in prices increases the risk of deflation - a chronic fall in prices that can hurt consumer spending for years. Deflation has become a key concern for the European Central Bank since the consumer price inflation rate fell to just 0.7 percent in the year to October, far below its target of just under 2 percent. The central bank reacted by cutting its benchmark rate to a record low of 0.25 percent this month.

ECB President Mario Draghi said Thursday that the rate cut was made to ensure the inflation rate rises back toward target on time - not because the central bank expects deflation to take hold.

"We acted to restore an appropriate safety margin" in the inflation rate, Draghi said in a speech in Berlin.

New inflation figures are due next week. If they show another drop, the ECB will come under renewed pressure to act again.

It could, for instance, lower the rate for bank deposits at the ECB to below zero, which could get them to loan money rather than hoard it. Officials at the bank have also broached the possibility of large-scale bond purchases.

"The ECB's Governing Council may see the need to intervene further to prop up the fledgling recovery, and our expectation remains for further non-standard support early in the new year," said Timo del Carpio, European economist at RBC Capital Markets.

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David McHugh in Frankfurt contributed to this report.
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