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European Economic Data Reveals Bleak Picture

Reuters
Thursday, 24 Jul 2008 | 5:30 AM ET

The euro zone economy appears to be taking a hammering as a key business survey released on Thursday painted a deteriorating picture, coming in well below analysts' expectations.

Data from around 5,000 companies across Europe showed euro zone services and manufacturing activity shrank at a faster pace in July and businesses see little respite in sight, with optimism at its lowest level in the survey's 10-year history.

Activity was well below economists' predictions while prices slipped only slightly from June's eight-year high as oil and food costs continued to soar.

The RBS/Markit Eurozone Purchasing Managers Index for services companies, which range from cafes to banks, fell to a five-year low of 48.3 in July from 49.1 in June, while economists had predicted the index at 48.8.

Euro zone manufacturing activity also defied expectations, remaining in negative territory as it slumped to 47.5 from June's 49.2.

It was predicted at 48.7, already well below the 50.0 mark that divides growth from contraction.

"It's really bad. It clearly plays in to the hands of the doves (at the ECB). If the ECB had the information that has come out it might not have announced a rate hike in July," said Gilles Moec at Bank of America.

Meanwhile, the closely-watched Ifo index showed the German business climate index at 97.5 -- significantly below the Reuters consensus forecast of 100.0 and its lowest level in three years.

Data from France showed business confidence fell more sharply than expected in July to its lowest level in three years while Italian business morale fell to a near seven-year low.

The euro fell more than half a cent after the slew of data was released.

The figures will make uncomfortable reading for the European Central Bank which raised interest rates to 4.25 percent this month as it battles inflation at a record high of 4.0 percent, way above its 2.0 percent target ceiling.

"With growth slowing abruptly and inflation expectations off the peak, risks of a near-term ECB hike have diminished substantially," said Marco Valli and economist at UniCredit MIB.

Expectations Falling

Companies in the 15-nation bloc are not optimistic about their future with business expectations in the dominant service sector at 50.2, its lowest since the survey began in 1998.

The survey showed inflation remains high as input prices in the service sector only trickled down from June's eight-year high of 65.7 to 65.2.

Meanwhile, the service sector shed jobs for the first time in four years as the employment index slipped into negative territory at 49.8, indicating firms are cutting costs by reducing the labour force and not expecting to be able to make use of higher staffing levels.

Manufacturing employment also fell to a three-year low at 48.6.

Earlier data showed services activity in Germany, the region's largest economy, picked up to 53.3 from 52.1 but France, the second biggest, saw activity slump to 47.0, its lowest since the survey began in 1998, from 50.1.

"There is economic stagnation in France with a risk of actually falling into negative territory," Moec said.

"In Germany it is still holding a bit better but if you look at the manufacturing PMI it is clear that things are also starting to turn sour.

Germany is doing better that the rest of the euro zone but it is not longer as incredibly better than the rest." Falls in both the services and manufacturing sectors took the Composite index down to 47.8, its lowest since November 2001.

Manufacturing output fell to 46.9, its lowest level since 2001, while new orders were also at seven-year low indicating the index was unlikely to pick up anytime soon.

Contact Europe: Economy

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