German private sector output shrank in April and eurozone business activity contracted further, a leading business survey showed on Tuesday, increasing the likelihood that the European Central Bank will decide to cut interest rates next week.
The Markit "flash" purchasing managers’ composite index for Germany, Europe’s biggest economy, fell to 48.8 in April, a six-month low and a drop below the 50.0 level that separates growth from contraction. For the eurozone as a whole, the PMI remained at 46.5, unchanged from a month ago, indicating that activity continued to contract at the same rate.
There is a relatively high correlation between PMI surveys and gross domestic product figures, which take longer to compile, making the surveys a closely watched indicator by policy makers. The "flash" readings are early survey results based on a large but not complete sample of responses.
Even the most hawkish members of the ECB’s governing council have indicated they would consider an interest-rate cut from 0.75 per cent if macroeconomic indicators continued to worsen. Economists are split over whether the bank is more likely to do so next week when its governing council meets in Bratislava or whether it would wait until its June meeting, when ECB staff will have revised their own economic forecasts.
The euro was trading about 0.7 per cent lower against the dollar after the data.
Markit also released a flash reading for France’s April PMI, which showed that the pace of contraction slowed to 44.2 in April from 41.9 in March. That however contrasted with a business survey from Insee, the national statistics agency, which said business confidence deteriorated in April, falling two points to 84 on its own scale, where 100 is the long-term average.
The eurozone PMI represented the 19th fall in activity in the past 20 months. The data for Germany was particularly discouraging, which has been a rare relative bright spot in the recession-bound eurozone despite its GDP contracting in the final quarter of 2012.
The survey is signalling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify in coming months than ease. The PMI data suggested eurozone GDP fell 0.2-0.3 per cent in the first quarter and, based on the April reading, pointed to a fall of 0.4 per cent in the second quarter.
The survey for Germany suggested slackening demand in Germany as backlogs of work decreased for the 22nd consecutive month, the longest such period of declines since the data series began 10 years ago.
The Bundesbank, Germany’s central bank, said on Monday that the industrial sector did not grow in the first quarter of the year. It added that services should have grown, but that this assumed the impact of especially cold winter weather had remained constrained.
A German slowdown is a political worry for Chancellor Angela Merkel, running for re-election in September. Although unemployment remains low – in stark contrast to the huge dole queues seen in other eurozone countries such as Spain – that situation could reverse if growth does not pick up.
Fiercely resistant to any – usually foreign – calls to stimulate domestic demand, the government has just trumpeted fiscal tightening, by hitting a so-called "debt brake" to balance the budget a year earlier than required.
Sheila McKinney
