Euro zone surveys point to easing recession

[July 24, 2009]  LONDON (AP) -- The 16 countries that use the euro saw activity in services and manufacturing contract far less than expected in July, a closely-watched survey showed Friday, in another sign the European economy may be stabilizing after a steep drop earlier in the year.

Financial information services company Markit said its purchasing managers index -- a broad gauge of business activity -- for the services sector rose to 45.6 in July from June's 44.7. Economists had expected a more modest increase to 45.

The increase does not mean that the sector is growing yet, just that the recession may be easing -- any reading below 50 indicates a contraction but the smaller the difference from 50 the less the contraction.

A similar improving picture emerged in the manufacturing sector, where the PMI rose to 46 from 42.6. The rise was far bigger than anticipated -- economists were projecting only a slight rise to around 43.5.

The composite PMI, which incorporates the two, climbed for the fifth month running to a ten-month high of 46.8 in July from June's 44.4.

Analysts said the latest survey provided further evidence that the euro zone is over the worst of the downturn, but that the 16-country single currency zone was unlikely to start growing as quickly as the U.S.

Hopes that Britain, which doesn't use the euro, may start to grow soon may have been dashed with the news earlier that it contracted by 0.8 percent in the second quarter from the previous three month period. Though an improvement on the 2.4 percent slump recorded in the first, the drop was way bigger than the 0.3 percent quarterly decline predicted in the markets.

Ben May, European economist at Capital Economics, said the composite index now points to around 0.3 percent drop in economic output in the third quarter from the previous three month period, a big improvement on the 2.5 percent drop recorded in the first quarter of the year and expectations for a 1 percent decline for the second.

A closely-watched survey into German business sentiment also indicated that the euro zone's largest economy was over the worst. The Ifo institute said its main business climate index improved for the fourth month running to a nine-month high of 87.3 points in July from 85.9 points in June. Again the rise was bigger than anticipated, with economists projecting an increase to 86.5.

Despite the increases in the PMIs and the Ifo, Capital Economics' May cautioned about getting too optimistic as both surveys have recently "over-predicted growth."

As in the U.S., investors will be poring over a raft of earnings statements from leading European companies to see if the improvements identified in the surveys are being felt in the real world.

The European reporting season kicks into gear next week, with steel company Arcelor Mittal, Deutsche Bank AG, carmaker Daimler AG, chemical company BASF SA and France Telecom SA among many to report.

So far in the U.S., the earnings reported have generally outperformed market expectations, stoking hopes that the world's largest economy is on the mend and may be on the verge of growing again -- that has helped stocks around the world enjoy two weeks worth of gains, which has sent many of the world's major indexes to highs for the year.

The European Central Bank will also be closely monitoring surveys and earnings to see if its strategy -- criticized by many for being less aggressive than the U.S. Federal Reserve and the Bank of England both in cutting interest rates or pursuing unconventional measures such as boosting the money supply -- is reaping dividends.

[Associated Press; By PAN PYLAS]

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