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Eurozone economy looking set to contract

Illuminated euro sign. Photo: Kai Pfaffenbach/Reuters

Illuminated euro sign. Photo: Kai Pfaffenbach/Reuters

Heavy discounting failed to stop eurozone business activity growing less than thought last month, a survey showed yesterday, suggesting the bloc’s economy may contract again early next year.

“The region is on course to see a mere 0.1 per cent GDP growth in the final quarter of the year, with a strong likelihood of the near-stagnation turning to renewed contraction in the new year unless demand shows signs of reviving,” said Chris Williamson, survey compiler Markit’s chief economist.

A Reuters poll last month predicted 0.2 per cent economic growth this quarter and 0.3 per cent next.

Markit’s final November Composite Purchasing Managers’ Index (PMI), based on surveys of thousands of companies across the region and seen as a good indicator of growth, sank to 51.1 from October’s 52.1, missing an earlier flash reading of 51.4.

November was the 17th month the index has been above the 50 level that separates growth from contraction.

But the new business sub-index fell below that mark for the first time since the middle of last year, dropping to 49.7 from 50.8 and suggesting a further downturn in December.

A PMI covering the region’s dominant service industry fell to 51.1 from October’s 52.3, shy of the flash 51.3, and showed firms have been cutting prices for three full years now to drum up business. The output price index came in at 47.1.

Further price cutting, together with signs of economic performance deteriorating in the core countries, will concern the European Central Bank which is battling to reinvigorate the economy and drive up dangerously low inflation.

Annual inflation dipped to 0.3 per cent in November, deep into the ECB’s ‘danger zone’ for price moves, although the central bank is not expected to alter its already very loose policy when it meets today.

The central bank is offering banks long-term cheap loans and buying covered bonds and asset-backed securities. However, facing resistance from Germany, there is only an even chance it will buy government bonds, a Reuters poll found last week.

“Survey results indicate that policy initiatives currently announced have yet to have a meaningful impact on business or consumer confidence in the region, and that more aggressive measures are likely to be needed, and quickly implemented, if another recession is to be averted,” Williamson said.

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