European Manufacturing, Services Contraction Weakens

European Manufacturing, Services Contraction Weakens

June 23 (Bloomberg) -- Europe’s manufacturing and service industries contracted at a slowest pace in nine months in June, adding to signs the recession is bottoming out.

A composite index of both industries for the 16 euro nations rose to 44.4, the highest since September, from 44 in May. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates a contraction. Economists forecast an increase to 44.9, according to the median of 12 estimates in a Bloomberg News survey.

The European economy is showing signs of stabilization after shrinking at the fastest pace in at least 15 years in the first quarter. German and French business confidence rose for a third month in June, reports showed this week. European Central Bank President Jean-Claude Trichet said this month the worst of the recession may be past after the ECB cut interest rates to a record low and pledged to buy covered bonds to fight the crisis.

Today’s report adds “to recent evidence that the worst may be behind and that the euro-zone economy is stabilizing,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “However, there is no reason for overhasty enthusiasm. A return to positive growth numbers might have to wait until 2010.”

Markit’s manufacturing index rose to 42.4 this month from 40.7 in May, according to today’s report. The services index fell to 44.5 from 44.8.

Financial Crisis

The worldwide financial crisis, which started with the collapse of the U.S. subprime-mortgage market in 2007, has led to more than $1.46 trillion of writedowns and credit losses at financial institutions, according to data compiled by Bloomberg, and sent the global economy into its first recession in more than six decades.

The euro-area economy may shrink about 4.6 percent this year and around 0.3 percent in 2010, the ECB forecasts. Trichet said on June 4 that the economy may contract “at much less negative rates” in the second half of the year. In the first quarter, gross domestic product dropped 2.5 percent.

ECB council member Ewald Nowotny said in a June 19 interview that the central bank won’t substantially alter its assessment of the economic outlook and is likely to keep interest rates steady for at least the rest of 2009. The ECB’s plan to purchase 60 billion euros ($83.2 billion) of covered bonds to spur lending will be carried out mainly by national central banks and maturities won’t exceed five years, Nowotny said in the interview in Vienna.

Global Slump

Companies across Europe have been forced to cut output and eliminate jobs to weather the global slump. Stuttgart, Germany- based Porsche SE, the maker of the 911 sports car, said on June 19 that nine-month revenue dropped 15 percent.

Europe’s economy lost a record 1.22 million jobs in the first quarter with payrolls declining 0.8 percent from the previous three months. The jobless rate, already at a decade- high 9.2 percent, may jump to 11.5 percent in 2010, the European Commission forecasts.

With increased unemployment offsetting the benefits of falling consumer prices, French household spending unexpectedly plunged 1.6 percent in May from a year earlier and was down 0.2 percent on the month, data today showed. Paris-based Air France- KLM Group may need to eliminate another 3,000 jobs, Chief Executive Officer Pierre-Henri Gourgeon said last week.

European stocks were lower. The Dow Jones Stoxx 600 Index was down 0.3 percent at 201.71 at 9:45 a.m. in London.

‘Eye of the Storm’

Deutsche Bank AG Chief Operating Officer Hermann-Josef Lamberti said on June 18 that the market is still in “the eye of the storm” as the credit crisis affects the real economy. “By no means is the worst over,” said Lamberti, who is also a member of the management board at Germany’s largest bank. “The financial crisis isn’t over.”

PSA Peugeot Citroen, Europe’s second-largest carmaker, said today that it may have an operating loss of as much as 2 billion euros this year, depending partly on the aid the French government is able to offer the auto industry. “A number of uncertainties remain,” the Paris-based company said.

European governments have boosted spending to bolster their economies, while the ECB this month kept its key rate at a record low of 1 percent. Gains in business and consumer confidence indicate that the measures may be starting to show results. Consumer confidence in Germany, the region’s largest economy, rose for a second month, data today showed.

“The euro-zone economic recovery is far from guaranteed and relapses remain a very serious danger,” said Howard Archer, chief European economist at IHS Global Insight in London. “It is imperative that the ECB does not rule out taking further efforts to boost economic activity.”

BLOOMBERG