F.T:Eurozone debt crisis weighs on Germany

The Financial Times

By Ralph Atkins in Frankfurt

The eurozone is stuck firmly in a sharp economic contraction, with the region’s escalating debt crisis hitting Germany with increasing severity, according to a closely watched survey.

Purchasing managers’ indices for the 17-country region showed private sector activity shrinking at the same pace as in May, which was the fastest in almost three years. But Germany’s economy, which has so far saved the eurozone from recession, suffered a significant deterioration, especially in its manufacturing sector – indicating its exporters were being affected by gloomier global conditions.

 “The downturn is gathering pace and spreading across the region,” warned Chris Williamson, chief economist at Markit, which produces the survey. The latest results suggested companies were “preparing for conditions to worsen in the coming months, with the darker outlook often attributed to uncertainty caused by the region’s ongoing economic and political crisis”.

One bright spot, however, was an improvement in the French purchasing managers’ indices – which suggested some of the gloom about eurozone prospects had been overdone.

The weak readings increase the pressure on policy makers for fresh measures to boost growth – and the chances of the European Central Bank cutting interest rates at its meeting on July 5. Benoît Cœuré, ECB executive board member, told the Financial Times this week that a cut had been “discussed at the last governing council meeting and I would expect the next council to discuss it again” – but he warned it would “certainly not fix the fundamental problems” facing the eurozone.

Eurozone gross domestic product was flat in the first three months of the year, thanks to a strong performance by Germany. But June’s purchasing managers’ indices – regarded as up-to-date indicators of growth trends – were consistent with a 0.6 per cent contraction in the second quarter, according to Markit. Germany was on course for a “marginal fall” in GDP, it said.

So far, the ECB has stuck to its view that the eurozone will gradually recover later this year – although Mario Draghi, president, has warned of “increased downside risks” to its outlook. But Peter Vanden Houte, European economist at ING in Brussels, said: “It seems clear that no significant recovery can be expected as long as the future of the eurozone remains in doubt.”

The “composite” eurozone purchasing managers’ index, covering manufacturing and services, was 46 in June – better than expected by analysts but unchanged from May’s figure which was the weakest since June 2009. A figure below 50 indicates a contraction in activity.

Germany’s “composite” index slipped from 49.3 to 48.5 but the country’s manufacturing index dropped from 45.2 to 44.7, a three-year low. France’s composite index rose from 44.6 to 46.7, a three-month high.



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