EURO ZONE:EURO ZONE services and manufacturing activity contracted for a fourth consecutive month in September, a key survey showed yesterday.
Data from about 5,000 companies saw activity in both the dominant services sector and the manufacturing sector drop after making a small recovery in August and pointed to an economy at best in stagnation.
The Markit Euro Zone Purchasing Managers' Index for services companies, ranging from cafes to banks, fell to a more than five-year low in August of 48.2, but was just ahead of economists' expectations.
"It's not catastrophic if you look at the figure itself. The level is consistent with stagnation, not with recession. But it looks like the third quarter is going to be challenging to say the least," said Gilles Moec at Bank of America.
These challenging conditions are also predicted to hit Ireland. GNP figures for the second quarter are due to be released tomorrow, with predictions from Davy stockbrokers that it expanded quarter-on-quarter due to stronger exports.
However, in a research note yesterday morning analyst Rossa White said that although the economy may have avoided entering technical recession in the second quarter it went into recession in the second half.
Although Davy said goods export volumes held up in the second quarter, services figures were likely to have disappointed when compared with rapid increases seen in recent years.
"Yet we expect a better performance than the dip in services exports in Q1.
"Interestingly, housing completions fell almost 30 per cent year-on-year in the quarter. The trend of recent months implies that 50,000 will be the total for the year. As a result, GNP may decline only marginally in 2008," it said.
The analyst said an analysis of payrolls, incomes, sales and production showed that the economy was already contracting.
House completions are expected to drop sharply in the final half of the year. Combined with weak consumer spending, sluggish goods exports to the UK and falling residential investment, Davy is predicting it will lead to an official recession in the latter part of the year.
"All of those trends will be amplified in 2009, when we project that the economy will shrink both in real and nominal terms," it said.
Meanwhile, euro zone manufacturing activity fell to a near seven-year low of 45.3 from August's 47.6, considerably below forecast and the 50.0 level that divides growth from contraction.
The news added pressure to an already falling euro.
A sharp fall in prices charged by companies in both sectors could make it easier for the European Central bank (ECB) to consider interest rate cuts to encourage growth.
Its last move, in July, was to raise rates to 4.25 per cent to fight inflation.
"Prices data are showing a welcome moderation," said Ken Wattret at BNP Paribas, but added: "On the output and input side, the readings are still too high for the ECB's comfort."
The ECB's focus on inflation has stopped it following the US Federal Reserve, which has slashed interest rates to support growth.
Euro zone inflation was at 3.8 per cent year-on-year in August, almost double the ECB's 2 per cent target ceiling. - ( Reuters)
