Tags: EU | China | Global | Economy

EU, China May Be Dragging Down Rest of Global Economy

Monday, 05 December 2011 12:06 PM EST

Europe's debt crisis might have pushed its economy into a steeper contraction than earlier thought and growth in China is sputtering, according to surveys on Monday that pointed to a sharp global slowdown under way.

While the service sector in the United States grew at its slowest pace in nearly two years in November, it continued to display underlying strength, with sturdy gains in both new orders and business activity.

The softer economic data from China and weak figures from the eurozone came at the start of a week that could prove crucial in resolving a debt crisis which threatens to tear apart Europe's common currency area — something that could have catastrophic implications for the world economy.

The eurozone's composite purchasing managers index (PMI), while improving slightly month-on-month in November, still tallied with a 0.6 percent quarterly rate of decline for the last three months of this year.

In the United States, the Institute for Supply Management said its services index fell to 52.0 last month — the lowest since January 2010 — from 52.9 in October. The reading was below economists' forecasts for 53.5.

"Globally if you take the PMIs together, there is great concern. The upward movement in the eurozone composite PMI is just a minor blip in clearly contractionary territory," said Philip Shaw, chief economist at Investec in London.

"The Chinese situation needs to be watched as well to see if this is just a blip or part of a trend. The saving grace I guess has been the U.S. ... where there does seem to evidence that it is moving out of its soft patch."

There was a rare piece of good news from Britain, where its services PMI unexpectedly rose last month, suggesting the UK may avoid recession, although perhaps not stagnation.

While recession in the eurozone now looks a foregone conclusion, there are worrying signs the Chinese economy is starting to sag — perhaps unsurprising given the European Union is China's biggest export partner.

Chinese service sector growth cooled in November to its weakest pace in three months, further backing a view that authorities will have to fine-tune monetary policy again.

German Chancellor Angela Merkel meets French President Nicolas Sarkozy on Monday to outline joint proposals for EU treaty changes that would involve tough sanctions for fiscally wasteful members.

Then on Friday there is a wider EU summit that some see as make-or-break for the eurozone after a string of half-measures that have failed to stop bond market contagion spreading from Greece to Ireland, Portugal and now Italy and Spain.

World stocks rose as confidence grew that European leaders would make big strides in solving the debt crisis.

But the most recent Reuters polling of leading global economists suggests the eurozone will not survive intact in its current form, unless Europe's leaders are willing to take action on a scale not seen in the last few years.


Markit's Eurozone Composite PMI, which measures changes in business activity across the eurozone, rose slightly to 47.0 in November from October's 46.5, albeit still far below the 50 mark that divides growth from contraction.

"The major eurozone countries are all now contracting and face the risk of recession," said Chris Williamson, chief economist at survey compiler Markit.

Markit said November's composite PMI put the eurozone on course for a 0.6 percent economic contraction in the fourth quarter — worse than any forecast from more than 30 economists polled by Reuters last month. The latest Reuters poll of economists showed a 60 percent chance the eurozone would fall into recession.

"Italy is faring the worst, with the survey suggesting that GDP could collapse by 1 percent in the fourth quarter, while both France and Spain are likely to see their economies contract by around 0.5 percent," said Williamson.

Britain's services PMI was an unexpected bright spot, rising to 52.1 in November from 51.3 in October. But survey compiler Markit said it meant the UK economy looks unlikely to grow much, taking into account some dire manufacturing data last week.

Analysts expect the European Central Bank will cut interest rates on Thursday and throw more funding lifelines to stressed banks.

Further central bank policy easing also looks likely in China, where HSBC's services PMI fell to 52.5, a sharp decline given that October's reading was 54.1 — the highest in four months.

"With price pressures easing further, Beijing can and should use policies that are targeted on small businesses and service sectors to keep GDP growth at above 8 percent for the coming year," Qu Hongbin, HSBC's chief China economist, said in a statement.

© 2024 Thomson/Reuters. All rights reserved.

Europe's debt crisis might have pushed its economy into a steeper contraction than earlier thought and growth in China is sputtering, according to surveys on Monday that pointed to a sharp global slowdown under way. While the service sector in the United States grew at...
Monday, 05 December 2011 12:06 PM
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