Euro Zone Services Growth Points to Weakness

Euro zone services growth slumped significantly below forecasts to a rate not seen in over four years this month, but manufacturing growth remained unchanged from December, a key survey showed on Wednesday.

The RBS/NTC Flash Eurozone Services Purchasing Managers Index fell to 52.0 in January from 53.1 in December, its lowest since August 2003 and well below economists' forecasts of 52.8.

However, the survey conducted between Jan. 11-22 found the equivalent factory PMI remained at the same level as December's 52.6, considerably above forecasts of a drop to 52.0.

The index measuring incoming new business in the service sector fell to 50.2, its lowest level since July 2003 and approaching the 50.0 dividing mark between growth and contraction, giving a further indication of trouble ahead.

The U.S. Federal Reserve unexpectedly slashed its benchmark lending rate by 75 basis points on Tuesday between regular meetings to 3.5 percent in a bid to lend support to an economy that is feared to be in or on the verge of recession.

Rate Cuts Ahead

The Bank of England is also widely expected to cut rates at its February meeting and the European Central Bank could follow suit later this year, some economists say, despite hawkish rhetoric from policymakers.

"Our expectation remains that the extent of the slowdown in the economy will eventually force the ECB's hand to lower its key interest rates in Q2," said Jacques Cailloux, chief euro economist at RBS.

However, despite tumbling equity markets around the world, business expectations in the dominant services sector climbed to a six-month high as hopes remain pinned on central banks taking an axe to interest rates to prevent a global downturn.

Cailloux said without an imminent rebound in equities markets PMI numbers would fall significantly from February but central banks have to walk a tightrope between cutting rates to boost a slowing economy and controlling rising inflation.
     
Manufacturing input prices growth soared to a six-month high, with this index rising to 64.2 as oil rose over $100 a barrel and the cost of food and energy continued to skyrocket. Output prices growth rose to a 10-month high.

Meanwhile, the sub-index measuring services sector input prices growth dropped to 62.1 from 63.0 and prices charged fell to 52.8 from 53.7.

"In the service sector there seems to be a much greater weakening of pricing power, especially in consumer facing sectors," said NTC's chief economist Chris Williamson, adding there had been no anecdotal evidence about wage deals.

"It's good news as far as the ECB are concerned in their inflation expectations," he said.

Manufacturing stocks of finished goods hit 50.4, the highest since September 2001 while outstanding business in the service sector fell below the 50.0 mark for the first time in two-and-a-half years.

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