Eurozone economy slows further as manufacturing slumps

Weak growth adds to doubts over ECB plans to wind down quantitative easing

Fears over a prolonged eurozone slowdown mounted on Friday as an influential gauge of business activity sank to its lowest level in four years, throwing further doubt on the European Central Bank’s plans to shelve its emergency support for the economy. A closely watched poll of purchasing managers in the eurozone indicated that the region’s slowdown continued into November, extending a run of weak growth that contrasts with last year’s robust recovery. The so-called PMI data, which ECB officials view as the best indicator of what will happen to growth, are the last before the bank’s crucial December vote, when president Mario Draghi is set to confirm plans to rein in its €2.6tn crisis-era programme of bond purchases, known as quantitative easing. Eurozone growth has been unexpectedly weak throughout 2018, yet ECB policymakers have held fast to the view that the poor data are a blip and should not divert them from plans to halt the expansion of QE at the end of the year.

Eurozone growth has been unexpectedly weak throughout 2018, yet ECB policymakers have held fast to the view that the poor data are a blip and should not divert them from plans to halt the expansion of QE at the end of the year. Officials hoped the most worrying setback — a fall in growth in the third quarter to a four-year low of 0.2 per cent — would be followed by a strong rebound in the final three months of the year. But purchasing managers’ indices for the single currency area as a whole, and for France and Germany, the two largest economies, fell in both October and November, suggesting that is now unlikely. Italy, the region’s third-largest economy, looks likely to enter recession soon.

 

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The disappointing data hit the euro, which fell as much as 0.4 per cent against the dollar on the day. Almost an hour after the publication of the first batch of the influential figures, the common currency was trading 0.3 per cent lower at $1.1375. European business leaders met ECB officials privately this week and voiced concern over the health of the economy, which meant that there was even further scrutiny to Friday’s PMI data. If an extension of QE is ruled out, the central bank may need to ease monetary policy by making a stronger commitment to carry on reinvesting the proceeds of bonds that have now matured. The ECB could also guide markets that it plans to keep interest rates at record lows for much longer. The PMIs for November are the latest sign of the damage that global trade tensions have done to an economy powered by exports. Germany’s economy, the largest in the eurozone, shrank by 0.2 per cent in the third quarter after bottlenecks in car production— its first contraction since 2015. A PMI sub-reading for eurozone manufacturers, which rely more on trade than services firms, dipped to a 65-month low, according to the flash figures from IHS Markit, which are based on 85 per cent of usual monthly replies.

All PMI readings were lower than anticipated, dashing policymakers’ hopes that stronger domestic demand will compensate for weaker manufacturing exports. Analysts at HSBC said: “The sharp reduction in service sector growth in Germany does not bode well for private consumption to pick-up in the coming months to offset the slowdown of the export sector, the traditional engine of growth in the biggest eurozone economy. “And in France, the sharp reduction in the pace of job creation could pose an additional challenge to the government’s ambitious reform agenda.” Markets are increasingly betting that policymakers will not raise interest rates from record lows for the duration of 2019. So far, the ECB has said that it “expects” to leave rates unchanged “through the summer” of 2019. Markets expect reinvestments to continue for at least a couple of years. At present, the ECB’s guidance is only that the reinvestments will continue “for an extended period of time” past the end of new QE.

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Source: www.ft.com

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