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Worst may be over for EU states

Brussels, January 5, 2013

Business activity in the US perked up in the final month of 2012, surveys showed, while hopes grew that Europe may be through the worst of its economic slump.

Britain's vast services sector, however, contracted for the first time in two years, suggesting the broader economy probably shrank as well in the final three months of 2012.

The Institute for Supply Management said its index of US service firms grew at its fastest clip in 10 months in December, boosted by a rise in new orders. The pace of hiring in the sector hit a five-month high.

"The overall tone was one consistent with modest economic growth," said Joshua Shapiro, chief US economist at MFR, a global consulting firm based in New York.

The 17-country euro zone, on the other hand, probably closed out the year in recession, though evidence that the pace of contraction in the service sector had slowed suggested things may be turning around.

"I think (the euro zone PMIs) are showing a decisive bottoming-out of activity," said James Nixon, chief European economist at Societe Generale.

"Now, the actual levels of the surveys are still consistent with GDP declining, but at least things aren't getting worse any faster."

According to financial information firm Markit, the euro zone's composite PMI, which measure the activity of thousands of companies, rose to 47.2 last month, its highest since March.

The decline eased among firms such as banks and restaurants, which comprise the bulk of the euro zone economy, though things looked worse for manufacturers.

"The surveys at least bring some substance to the belief that the worst is over and that a return to growth is in sight for the region in 2013," said Chris Williamson, chief economist at Markit.

The UK services PMI, however, slipped to 48.9 from 50.2, sagging below the 50 mark that divides expansion and contraction for the first time in two years.

"The broader picture is that for some time the economy has been bouncing around the bottom ... and I think this is likely to stay with us for the next couple of quarters," said Rob Wood, chief UK economist at Berenberg Bank.

Survey compiler Markit said the figures suggest Britain's economy shrank 0.2 per cent in the final quarter of 2012, a slightly bigger drop than most other private-sector forecasts.

Yesterday's European data followed news that China's services sector saw its slowest rate of expansion in nearly a year and a half in December, although the HSBC services PMI still pointed to a modest revival in economic growth.

Fears that China's economy would hit the skids kept investors on their heels in early 2012, but data in the second half of the year suggested the world's second biggest economy would avoid a hard landing and continue to grow modestly.

With Europe likely to remain in recession, the world economy will increasingly depend on China and the US to provide the fuel for continued growth.

Recent US data, particularly from the labour market, has been encouraging, not least because firms continued to hire in December despite a looming government budget crisis that many feared would bring on recession in 2013 if not solved.

"This supports the view that the economy is picking up steam and employers added to payrolls even with worries about the fiscal cliff," said Andrew Wilkinson, chief economist strategist at Miller Tabak & Company in New York.

A last-minute deal to avoid going over the US "fiscal cliff" of tax increases and spending cuts was struck on New Year's day by Congress, though decisions on some important spending issues were delayed rather than decided.

In addition, minutes from the last Federal Reserve policy meeting published on Thursday showed some officials were worried about the risks associated with the central bank's open-ended asset buying programme, known as quantitative easing.-Reuters




Tags: economy | banks | US | Europe |

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