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Euro Zone Data Could Force Faster ECB Action

The latest euro zone flash PMI data—which is usually a good advance notice of the state of the economy—pointed to a recession in the area, increasing hopes that politicians and central banks in the region will be forced to take further action to solve the euro zone crisis sooner.

E.U.
Photo: Bloomberg | Getty Imgaes
E.U.

Economists seemed to agree almost universally that the figures reinforced the picture of a region in a prolonged period of negative growth. Recession (CNBC Explains: What Is a Recession?) is expected to have begun in the second quarter and continue through the third.

The data is “yet another reminder that a chronic lack of economic growthin the euro zone will continue to impede efforts to bring the debt crisis to an end,” according to Jonathan Loynes, chief European economist, Capital Economics.

There was some better-than-expected news from France and Germany, the euro zone’s two biggest economies, which is likely to help German bundsretain their safe haven status. (Read More: Bailout Jitters Fail to Rock German Bunds)

“The headline indices all remain firmly in contractionary territory, with an improvement in manufacturing balanced by deterioration in the headline services balance. There were small signs of encouragement: the manufacturing PMI improved by over 2 points in Germany and France, and the French surveys improved across the board for the third straight month,” Gustavo Bagattini, European economist, RBC, wrote in a research note.

However, this relative strength indicates that peripheral economies such as Spain and Italy are likely to have had an even gloomier picture than thought, which will give the arguments for more action from the European Central Bank (ECBclick here for more) greater weight.

“The PMI new orders clearly signal that the ECB should ease further,” Frank Oland Hansen, senior analyst at Danske Bank, argued.

“We would not complain if this is done by announcing unlimited (conditional) purchases of Spanish and Italian government bonds to keep rates down.” (Read More: Spain Seeks Forceful Bond Buying by ECB)

The potential for the ECB to intervene in the bond markets has helped buoy the market in recent weeks, although some have expressed concern about the central bank being on the hook for more euro zone debt.