Eurozone Services PMI April 2008

Eurozone service sector growth held steady at a slightly slower pace in April as faster growth in Germany contrasted with weakness elsewhere; Spain in particular stood out and reported record job cuts.

The RBS/NTC Eurozone Services Business Activity Index rose from 51.6 in March to 52.0 in April, coming in slightly above the earlier flash estimate of 51.8. However, the rise still indicated only a very modest acceleration in growth, with the rate of increase remaining weak by historical standards of the survey (and only slightly above the average reading for Q1, which had been the weakest quarter since Q2 2003).

Germany

Germany's services sector expanded for the third month running in April and at its fastest pace in six months, buoyed by a marked upturn in new business growth, The NTC services PMI survey showed on Tuesday.

NTC Research's business activity gauge for German firms ranging from banks to catering rose to 54.9 from 51.8, holding above the 50 mark separating expansion and contraction for the third month running and hitting its highest level in six months.
Even so, firms were less upbeat about the corporate outlook. Business expectations remained in the 'expansion' zone, but stayed well below the long-run series average, registering 51.2.

"The business expectations index ... does suggest that firms are very cautious," said Chris Williamson, chief economist at NTC, which compiles the data.
Anecdotal evidence suggested that a weaker economic outlook for the next 12 months weighed on business sentiment, NTC said.

The German government expects economic growth to slow to around 1.7 percent in 2008 from 2.5 percent last year. Next year it has forecast expansion of some 1.2 percent.
Although economic indicators point to the German economy, Europe's largest, making a strong start to this year, it has not escaped the fallout from the global credit crisis.

While a new business index rose sharply to 55.6 in April from 52.1 in March, the financial intermediation sector was the only one of six broad areas of the services economy where new business did not grow in April, NTC said.

An index on input prices rose to 62.7 from 60.3 in March. That reading was the highest this year and only just below last December's seven-year high.

France

France's service sector grew at its weakest pace in nearly five years in April as an economic slowdown stemmed the flow of new business, a NTC/CDAF survey showed on Tuesday. Their Purchasing Managers' Index of the French services sector dropped sharply to 52.8, its lowest since August 2003, from 57.3 in March.

"The subdued rise in activity during the latest month marked a significant turnaround from the resilience seen in the first quarter of the year and suggests that deteriorating economic conditions may finally be taking their toll on France's dominant service sector," NTC said in a statement.

New business growth slowed to its weakest since September 2004 as firms reported a general softening in demand and a dearth of client inquiries.

"It looks like consumers have reined in spending on services quite significantly," said Chris Williamson, chief economist at data compiler NTC.

Slowing growth is also jeopardising President Nicolas Sarkozy's goal of cutting unemployment, and the NTC/CDAF survey showed firms in the service sector are already responding to the weaker economic climate by scaling back hiring.
In a sign that inflation pressures are persisting, the survey showed service sector firms continued to raise the prices they charged as their input costs kept increasing.


Italy


Italian service sector activity contracted for the fifth month running in April, but by less than expected, an NTC/ADACI survey showed on Tuesday. The NTC Research Purchasing Managers' Index rose to 49.8 from 48.8 in March. The survey's sub-index on new business rose to 48.5 from 48.3, its sixth consecutive month of contraction.

"April figures painted a slightly more positive picture of the Italian services economy, although activity and new orders continued to fall, reflecting a continued difficult economic environment," said Verity Howell, an economist at NTC Economics which compiles the data.

NTC's chief economist Chris Williamson said the data provided a glimmer of hope that the services PMI may be on an uptrend after February's decade low of 47.2. "I remain sceptical until I see the numbers actually come up above 50. We're at 49.8, we're nearly there, but I have a suspicion that what we're seeing is a dead cat bounce in some respects, that things could come down further," he said.

The hotels and restaurant sector was the only segment to record any growth in new business. Transport and storage posted the biggest shrinkage in new business. This reflected the weakness in Italian manufacturing where the April PMI index showed a contraction for the second month running, reaching its lowest point since May 2005.
The services survey also revealed nervousness about the future, with the business expectations index only just above January's all-time low.

"They are obviously pessimistic," said Williamson. "I think going forward you will see further pressure to cut back expenditure and employment levels and that's going to feed through to growth."

The data showed an easing in inflationary pressures with the input prices index down to 64.2 from March's 66.4. The prices charged index fell to 51.7 from 52.1.


Spain


Spain's service businesses cut jobs in April at the fastest pace in the near nine-year history of an NTC survey of the sector as demand contracted for the sixth month running, data from NTC showed. In the wake of a Bank of Spain forecast that economic growth slowed to 2.8 percent in the first quarter from 3.5 percent in the final quarter of 2007, the PMI survey showed both activity and new orders fell sharply, although the slide was slightly less pronounced that a month ago.



The headline index for the sector edged up to 42.5 in April from 40.9 in March, while the new business index was unchanged from March's survey low of 40.2, its sixth month below the 50 divide between growth and contraction.

Chris Williamson, chief economist at NTC Economics, said the survey showed that Spain's downturn had expanded well beyond the property sector -- the engine for a decade of Spanish growth which is now running out of steam. "It looks like there's a broad-based downturn occurring here, and there's evidence to suggest that's going to continue in the coming months," Williamson said.

Only two sectors of the six sectors surveyed -- business-to-business services and IT -- showed any growth at all, said Williamson.

"All sectors exposed to the consumer are having a hard time, which suggests that basing forecasts on weakness confined to property and construction is being rather hopeful."

Official data last month showed the unemployment rate jumped in the first quarter to a 3-year high of 9.6 percent and NTC said that based on the PMI survey, that would rise further in the second quarter. The PMI showed the sharpest decline in employment in the sector since the survey began in August 1999 as companies adapted to reduced workloads. Optimism also hit a survey low, for the third month running, although more than one third of those surveyed thought business would pick up in the next year.


Ireland


Irish Service Sector activity fell at sharpest rate since October 2001 in April while confidence eased to lowest level for over six-and-a-half years. Irish service sector activity providers registered a third successive monthly contraction of business activity in April. Moreover, the rate of decline accelerated and was the sharpest since October 2001. At 45.2, the seasonally adjusted Business Activity Index posted its second-lowest reading in the eight-year survey history after falling for the fourth month running.

Commenting on the survey, Eunan King – Chief Economist at NCB Stockbrokers – said:
“The index of the overall level of business activity in April was only marginally above the low seen in October 2001, though the index dipped to close to these levels in the middle of 2003, as the Iraq war got underway. The picture for new business, outstanding business and employment is not dissimilar. Confidence is, however, below the 2003 level, though still comfortably above the 2001 low.The main reasons cited for the weakness of the indices relate to the construction sector and deteriorating global economic conditions. Input costs accelerated while prices charged remained fairly static, leading to deterioration in profitability. Overall, not a good story for the service sector."."

Data for April signalled the second-sharpest fall in Irish service sector business activity in the eight year survey history. The sharp decline in activity was widely attributed to lower new business levels as firms reported reduced property and construction related activities in particular.

Irish service providers' new business volumes declined for the third month running in April. The rate of new business contraction was solid, although slightly weaker than in March. There were reports that the poor economic health of the construction sector was adversely affecting demand. Firms also mentioned deteriorating global economic conditions and greater competition.



Service sector employment declined for the second month in a row in April, although at only a marginal pace. Where a reduction in staffing levels was recorded, this was linked to lower new business volumes and ongoing economic uncertainty.



Input cost inflation accelerated to its sharpest rate for twenty-two months in April. The substantial rise in costs was linked to higher staff salaries and increased energy and transport costs.

Increased overheads underpinned a slight rise in service companies' output prices in April. Greater competition and reduced new business led to lower rates charged at some firms.

Business confidence

In April, confidence regarding activity in a year's time was at its lowest since September 2001. Anecdotal evidence suggested that worsening economic conditions had dampened expectations, while the continuing credit crisis and weakness of the construction sector also contributed to a negative outlook. Nevertheless, service firms were optimistic overall, expecting that merger activities and marketing campaigns would lead to growth in the year ahead.

Eurozone Manufacturing PMIs April 2008

European manufacturing growth slowed for a third month in April as cooling global demand and a stronger euro took their toll on export orders. Royal Bank of Scotland Group Plc's manufacturing index fell to 50.7 from 52 in March, according to NTC Economics Ltd., which carries out the survey of purchasing managers. That's less than an initial April 23 estimate of 50.8 and the lowest since August 2005. A reading above 50 indicates growth.

The final RBS/NTC Eurozone Manufacturing PMI came in at 50.7 in April, down from 52.0 in March and slightly below the earlier flash estimate of 50.8. The fall in the PMI was the largest for six months and took the index to its lowest since August 2005.

National trends among the big-four euro nations varied markedly again in April, as did production by sector, with consumer goods producers reporting a survey record decline in output.

The PMI (Purchasing Managers' Index) was particularly weak, registering the first decline in new orders since May 2005 (in line with the flash reading). New export orders fell by marginally more than indicated by the flash reading, also declining for the first time since May 2005 due to softer economic growth in key foreign markets and the strong euro.

Among the big-four euro countries, only Germany recorded an increase in new orders, though the rise was the smallest for three months. This deterioration was primarily the result of a substantial easing in growth of new export orders at German manufacturers. Spain and Italy both saw new orders fall at the steepest rates since December 2001.

In a sign of broad-based weakness of production to come in future months, new orders for consumer, intermediate and investment goods (such as plant and machinery) all fell in April, albeit only marginally in the case of investment goods. Consumer goods producers saw the sharpest monthly drop in new orders in the survey’s ten-year history, in part reflecting lower levels of new export orders.

``Germany will do better than average,'' said Dominic Bryant, an economist at BNP Paribas in London, in a research note to investors. ``At the other end of the spectrum, Italy and, in particular Spain, will have a very tough year with growth well below trend.''

German PMI

German manufacturing activity weakened to its slowest pace in four months in April, but held above its long-term average thanks to robust expansion in output. A dip in new orders growth, however, suggested pressure on output may increase in coming months and the pace of job creation slowed to the weakest since October.

The NTC/BME Purchasing Managers' Index (PMI), based on a survey of 400 firms, slipped to 53.6, adjusted for seasonal swings, from March's seven-month high of 55.1, NTC said.

"The manufacturing sector remained on a healthy footing at the start of the second quarter, with production rising at a robust and above-trend rate," said NTC economist Tim Moore. "However, output growth was again slower than the peak of the current growth cycle and will likely come under pressure in the months ahead following the relatively subdued improvements in new order volumes recorded on average in 2008."

A measure of output rose to 55.3 in April from 54.7, NTC said. By contrast, a gauge of employment fell to 54.2 from 56.5 and a measure of new orders dropped to 52.5 from 54.9.

An NTC gauge of new export orders signalled the second-weakest increase for around three years, falling to 51.8 from 54.0.

"There were reports that the strong euro and deteriorating economic conditions in the United States had both weighed on export demand," the group said. NTC chief economist Chris Williamson said the impact of the strong euro was most discernible in the consumer goods sector in April's survey. "Whether that's down to the euro or just general easing of consumer sentiment in key trading partners like Britain and the United States remains to be seen," Williamson said. "There are problems in competitiveness creeping in because of that strong euro on a broadbased scale," he added. On prices, Moore said a surge in steel and energy costs had underpinned a sharp increase in average cost burdens last month, with the rate of inflation only just below March's eight-month high. "April data suggest that the spike in pipeline inflationary pressure has begun to make its way to the factory gate, as output prices rose at the third-strongest pace in the series history," Moore added

France

Shrinking orders and slowing output caused French manufacturing growth to fall to its weakest level in six months in April.
The NTC/CDAF Purchasing Managers' Index (PMI), came in at 51.1, below March's 51.9 and under the flash estimate and economists' forecasts of 51.5. The index reading added weight to recent data showing a French economy was slowing, even if not as rapidly at this point as some of the other members of the eurozone.

"It looks increasingly possible manufacturing could contract... It all very much depends on factors like the strength of the euro and global demand," said Chief Economist Chris Williamson at data compiler NTC. "We could see some negative figures this autumn... consumers just aren't buying, and the consumer goods industries already reported output contraction in April."

New work placed with French manufacturers contracted for the first time since last September, with the new orders index falling to 48.6 from 50.1 in March.
Output growth slowed, slipping from 53.4 in March to 53.1, well below the long-run average of 54.9. Rising prices led French consumers to cut back in March, and monthly spending fell by its sharpest rate in a year and a half. In April, household confidence dropped to its lowest level in over two decades.

NTC's Chris Williamson said fading demand could affect unemployment, which has been on a downward trend since 2005.

"I think we'll see some modest cuts in employment and net job losses, like we saw at the end of last year, going through to the third quarter," Williamson said. "But French manufacturers have been very conservative in their hiring, especially compared to German and Spanish manufacturers... so that suggests they're lean already and may not need to focus so much on reducing staff costs," he added

Italy


Italy's manufacturing sector contracted for a second month in April, posting its weakest performance since May 2005 and casting a deepening shadow over growth prospects, accoring to the NTC/ADACI PMI survey.

The NTC Purchasing Managers Index fell to 48.2 from March's 49.4, sinking further below the 50 divide between growth and contraction. The survey is the latest in a string of negative data for the euro zone's third largest economy, underscoring the tough task awaiting incoming Prime Minister Silvio Berlusconi after his victory in last month's general election.

"There are really no indications of a turnaround, with backlogs of work still falling and new orders the weakest since December 2001," said Chris Williamson, chief economist at NTC Research which compiles the data.
"The big area of weakness in Italy is in the domestic economy, and within that the consumer sector where things are going form bad to worse."

The International Monetary Fund forecasts the Italian economy will grow just 0.3 percent this year, and Williamson said the PMI data pointed to a contraction of gross domestic product in the first and second quarters, and possibly beyond.

"These PMI figures are very much signs of recession," he said, forecasting that the rate of job losses is likely to pick up, hitting consumer confidence further. Italy's 1.5 percent 2007 growth rate was little more than half the euro zone average, maintaining a trend of Italian underperformance that has persisted for at least a decade.

The survey showed employment levels fell for the third month running and the manufacturing output sub-index pointed to a fall in output for the first time since May 2005. Input price inflation eased significantly to a four-month low but, with an index level of 64.2, remained at a high level by historical standards.




Spain

Spain's manufacturing sector shrank at its fastest rate in more than six years in April and more hardship seems to be on its way as orders continued to dry up. Spanish economic growth is expected to halve this year from last year's rate of 3.8 percent as property sales plunge, the construction sector shrinks, loan defaults rise, and unemployment surges.

The NTC Purchasing Managers Index (PMI) showed the gloom had settled firmly over the manufacturing sector which shrank for the third month in a row, dropping from 46.4 in March to 45.2 in April, its lowest in 76 months and well below the 50-mark that separates growth and contraction.



The new orders index dropped to 42.0 from 45.3, which NTC put down to weaker demand from the building sector and foreign buyers put off by the strength of the euro. Export orders dropped at the fastest rate in almost five years.

"The continuing strength of the euro and worsening global economic conditions suggest external demand is unlikely to fill the void left by the end of the construction boom." said Nathan Carroll, an economist at NTC.

Employment slipped for the eighth month running and at the sharpest rate for three years at 47.7 as manufacturers tried to cut costs and make up for lower orders.
That might put in doubt government predictions that industry can provide new jobs for those who have been laid off from the construction sector.

"I suspect that these numbers will provide some worrying reading for anyone thinking that the manufacturing sector can absorb jobs from construction ... employment is falling for the eighth month running and the indications are that companies are going to cut back further," said Chris Williamson, chief economist at NTC. "The long term trend in employment is difficult to say ... but would we expect to be seeing job losses in industry in the INE survey in coming quarters? Yes."

EU Economic Sentiment Indicator

Economic confidence across the eurozone is eroding rapidly, with increasing signs that the growth slowdown is hitting the region’s labour market, a closely-watched survey has shown.

The European Commission’s eurozone “economic sentiment” index has fallen sharply from 99.6 in March to 97.1 in April – the lowest level since August 2005. With the indicator regarded as good guide to growth trends, the unexpectedly steep decline pointed to a marked deceleration in economic activity.




The latest data could fuel speculation that the European Central Bank will cut interest rates later this year. Eurozone inflation data showed eurozone prices rising at an annual rate of 3.3 per cent this month – down from 3.6 per cent in March – suggesting that the worse may be over in terms of price pressures.

However, the ECB expects inflation to moderate only gradually over the next 18 months – and earlier this week the Commission forecast that in 2009 the average rate would still be above the central bank’s goal of an annual rate “below but close” to 2 per cent. The ECB is widely-expected to keep its main interest rate unchanged at 4 per cent when it meets in Athens on Thursday, despite cuts by the US Federal Reserve.


Eurozone countries show varying performances. Economic sentiment in Spain, which is at risk of a serious house price correction, has fallen to the lowest level since late 1993. But sentiment in Germany and France remains relatively robust – falling to the lowest levels since February 2006 and December 2005 respectively.