Europe Economy

Euro Zone Services, Sales Data Stoke Recession Fears


Euro zone service sector growth slowed sharply in January from an already weak estimate and retail sales fell in the key Christmas period, according to data on Tuesday that stoked fears of a recession.

Three of the big four economies in the 15-nation bloc polled by RBS/NTC Economics showed business activity contracting, led mainly by financial services, while only France registered growth during the month.

Separate figures showed Eurozone retail sales unexpectedly fell in the key Christmas shopping month of December, and declined for the third month in a row.

"Eurozone growth is in trouble and the risk of recession at some stage should not be underplayed. Business confidence is sliding and consumer morale is being hit hard," said David Brown, chief European economist at Bear Stearns.

The euro fell sharply against the dollar and euro zone government bonds rallied as analysts said the services data increased pressure on the European Central Bank to soften its hawkish stance on interest rates.

The Eurozone Services Purchasing Managers Index fell a remarkably sharp 1.4 points to 50.6 in January from an earlier flash estimate. The index is now dangerously close to the 50 mark that divides growth from contraction.

The figures mark a new four-and-a-half year low for the index and come in well below the lowest forecast of 51.7 in a Reuters poll of 36 economists.

But not all economists were sounding the alarm bells.

"The extent of the deceleration is quite surprising," said Guillaume Menuet, an economist at Merrill Lynch.

"We will have to wait and see what the February numbers say," he said, adding the index could rebound and it was too early to assume 'a doomsday scenario'.

Separate figures showed Britain's service sector held up well in January and growth in prices charged rose for the sixth straight month to near their highest on record.

Data due later on Tuesday at 10 am New York time are expected to show growth in the U.S. service sector slowed in January, underscoring worries about a recession stemming from a deepening housing slump and global credit crunch.

ECB Dilemma

Jacques Cailloux, chief euro area economist at survey sponsor RBS said it was likely the euro zone's dominant service sector would contract this month, adding there was little chance of a bounce "any time soon."

The German services index skidded into negative territory while Spain's plummeted. France's bucked the trend, showing overall growth, while Italy completed the downturn by the big four euro zone countries.

However, it appeared the weakness in the services PMI stemmed in part from severe turmoil in financial markets. Late in January intense selling rounded off a near 14 percent drop in Europe's Stoxx50E, its worst ever performance in the first month of a year.

Indeed, the service sector decelerated despite a rise in the region's manufacturing PMI reported last week, marking the biggest divergence between the two since 2006 when the service sector was boosted by the World Cup soccer tournament.

To top it off, the ECB's struggle to balance the threat of an economic slowdown becoming a recession against rising inflation also got more complicated.

Output prices growth was revised up sharply from the flash estimate and came after official data showed last week that euro zone inflation hit a record high of 3.2 percent in January.

"In the short term I don't think it will change their assessment: the doves will highlight the downside risks to growth and the hawks will find munitions to say we are still in the process of strong inflationary pressure," said Gilles Moec, an economist at Bank of America in London.

Still, a Reuters poll last week found economists bringing forward the expected timing of an ECB interest rate cut from the current 4 percent to the second quarter from the second half, with a second cut anticipated by year-end ECI/INT.