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Signs of global slowdown strengthen, debt crisis partly to blame

By Reuters
Thursday, July 21, 2011 7:17 EDT
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LONDON (Reuters) – Growth ground to a halt in the euro zone’s private sector this month while China’s factory sector contracted for the first time in a year, surveys showed on Thursday, deepening evidence of a sharp slowdown in the global economy.

The surveys were published just before European leaders meet for a crisis summit to hash out a second bailout of Greece and allay fears a debt default by Athens will poison access to the bond market for bigger states.

In the latest sign economic growth is dwindling, Markit’s Eurozone Purchasing Managers’ Indexes showed growth in the 17-nation bloc’s factory sector came to a standstill in July while its dominant service sector grew at its slowest rate in 22 months.

“The large fall in the flash euro zone PMI in July provides further signs that the debt crisis may be starting to take a heavy toll on the economic recovery in the region,” said Ben May at Capital Economics.

The debt crisis, which has so far pushed Greece, Ireland and Portugal into bailouts, shows no signs of losing momentum, raising fears in recent weeks that it will engulf Italy and Spain as well.

But France and Germany reached a joint stance on a second bailout for Greece late on Wednesday, ahead of Thursday’s summit in Brussels, that would supplement a 110 billion euro ($156 billion)rescue plan for Greece launched in May last year.

It is expected to include fresh emergency loans to Athens from euro zone governments and the International Monetary Fund, and possibly a range of other austerity measures that have already put the brakes on growth across the region.

The flash services PMI sank to 51.4 this month from 53.7 in June, its lowest level since September 2009 and falling far short of expectations for 53.0 but has been above the 50 mark that divides growth from contraction for nearly two years.

The flash manufacturing PMI fell to 50.4 from 52.0 in June, its lowest reading since September 2009 and missing consensus expectations in a Reuters poll for 51.5.

“There is no doubt that the free fall in the PMIs of the last three months comes as a negative surprise. We believe that external factors remain predominant, in particular the ongoing softening in the global factory cycle, as shown by further signs of weakness in China this morning,” said Marco Valli at UniCredit.

China’s factory sector contracted for the first time in a year in July and at its fastest pace since March 2009 as monetary policy tightening and slack global demand weighed on the economy, according to HSBC’S Chinese PMI.

PRODUCTION PLUMMETS

Output in the euro zone’s manufacturing sector, which drove a large part of the recovery in the bloc, shrank for the first time in two years, with the index falling to 49.5 from 52.5, its lowest since July 2009.

Factories also saw new orders falling for the second month running, with the index sliding to 47.6 from 49.8, its lowest reading since June 2009.

“We have orders in contractionary territory which tells you that the European economy is losing momentum at a time when the resolution to the crisis is going to be heavily dependent on a strong Germany,” said Peter Dixon at Commerzbank.

An earlier release from Germany, Europe’s largest economy, showed its composite PMI staging the biggest one month fall since late 2008, slumping to 52.2 from June’s 56.3.

The picture was little better in France, where the composite index fell to a 23-month low of 52.8 from June’s 54.9.

The glum indexes meant the euro zone composite PMI, a broader measure of the private sector which combines the services and manufacturing data, collapsed to 50.8 from 53.3, well below forecasts for 52.6.

The composite index is often used as a guide to growth and Markit said if the PMIs remained at current levels there would be no economic growth in the third quarter, and without the tepid growth seen in Germany and France the euro zone index would have been negative.

Economists polled by Reuters this month predicted euro zone growth of 0.4 percent this quarter.

DEBT DEFYING

But in the face of the intensifying debt crisis and an onslaught of downbeat data the ECB raised interest rates earlier month for the second time this year, and signaled another hike is likely later in the year.

Economists expect the ECB to raise rates one more time this year, to 1.75 percent, followed by another hike in the first three months of 2012 to fight inflation.

Service sector firms increased prices faster than last month, with the output price index rising to 53.0 in July from June’s 52.4, matching April’s 33-month high.

In one bright spot for policymakers businesses continued to take on new workers, and at a slightly faster rate than in June, with the composite employment index rising to 52.2 from June’s 8-month low of 52.0.

(Additional reporting by Kevin Yao in Beijing, editing by Tony Chopra; Ruth Pitchford)

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