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A close look at the economic slowdown in the Eurozone shows that recent growth in the services sector has been slowing and inflationary pressures are easing.
The benchmark Purchasing Managers’ Index, a measure of activity in manufacturing and services, fell to a five-month low of 50.3, down from 52.8 last month. It was below economists’ forecast of a reading of 52.5 in a Reuters poll.
Falling below the 50 mark that separates contraction from expansion, the result will dampen prospects for an economic recovery after two quarters of mild contraction in the 20-nation single currency zone.
“It’s quite a slowdown,” said Carsten Brzeski, an economist at Bank of the Netherlands Eng. “This shows that the ECB’s forecasts are entirely optimistic. We’re heading into another weak quarter, we could be flirting with recession again.
The European Central Bank had forecast gross domestic product in the bloc to grow by 0.9 percent this year, after a fall of 0.1 percent in the previous two quarters. This was widely seen as too optimistic and economists said the PMI data made it almost certain that the forecast would be cut in September.
“These data are not pretty,” said Klaus Vystesen, an economist at the Pantone Macroeconomics research group, who said the figures were consistent with growth in the rest of the euro zone, which was “downgraded” in the second and third quarters of this year.
The biggest surprise in the HCOB Flash Eurozone Composite PMI data was the sharp slowdown in the services sector, which has been one of the few positive areas for most of the Eurozone economy this year.
The slowdown was particularly sharp in France, where activity levels among service companies contracted for the first time since the start of the year. This contrasted with the UK services sector, which slowed slightly and remained in expansionary territory in June.
This could strengthen the case among many dovish policymakers at the ECB, who say the central bank is “very likely” to be more cautious about raising interest rates beyond what they previously indicated in July.
Investors responded by betting that the ECB would not raise rates as much as they had previously thought. Germany’s two-year government bond yield, which moves inversely to its price, fell 10 basis points to 3.12 percent. The euro fell almost 1 percent to $1.085 against the dollar.
The survey indicated that price pressures have continued as input costs for manufacturing companies have fallen sharply since July 2009. This shows that the euro zone’s industrial producer prices have recently declined, continuing to decline by 3.2 percent in the year to April.
However, what still worries ECB ratemakers is that input costs for services companies are rising at a faster than historical average rate, “primarily driven by wage pressures,” said S&P, which conducted the survey. Workers’ wages in the bloc rose more than 5 percent in the first quarter of the year, while unemployment fell to a low of 6.5 percent in April, prompting ECB officials to fear a rise in services inflation.
Eurozone inflation fell to 6.1 percent from 10.6 percent in May and is expected to ease to 5.7 percent in new data next week. But the ECB can focus on the main pace, excluding energy and food, which will increase from 5.3 percent in May due to the increase in the price of services.
Separately, German house prices fell by 6.8 percent in the first quarter of this year.