Eurozone suffers 'worst' jolt since 9/11
Sunday, 23 September 2007
Ralph Atkins, FT Syndication Service
FRANKFURT: The eurozone economy has this month suffered its biggest jolt since the aftermath of the September 2001 terrorist attacks, with global financial turmoil hitting the services sector particularly hard, according to a closely watched survey.
The unexpectedly steep fall on Friday in the eurozone purchasing managers' index - the third consecutive monthly drop - could knock policymakers' previous confidence that the 13-country eurozone economy would escape largely unscathed from the US subprime mortgage crisis.
Although the slowdown may prove temporary - and the survey showed companies continuing to take on staff at a rapid rate - it coincides with the euro's rise to record levels against the dollar and on a trade-weighted basis, which will hit eurozone exports.
The European Central Bank will see the survey data adding to uncertainty over the outlook and reinforcing its recently adopted "wait and see" stance towards interest rate increases.
But financial markets have started speculating that the next ECB interest rate move will be downwards.
Friday's data showed the fastest deceleration in eurozone service industry growth in the survey's nine-year history, almost certainly reflecting problems faced by the finance sector. In manufacturing, the slowdown was less steep but still bore the effects of higher eurozone interest rates over the past two years as well as the stronger currency.
The global credit squeeze "was not just a shock to confidence but is having serious repercussions on the real economy", said Jacques Cailloux, economist at the Royal Bank of Scotland, which releases the survey in conjunction with NTC economics.
The composite purchasing managers' index - intended as a guide to activity in both the manufacturing and services sector - dropped from 57.4 in August to 54.5 in September. That was the biggest drop since October 2001 and indicated the slowest growth for two years.
Earlier this month, the European Central Bank shelved a planned rise in eurozone borrowing costs pending more information on the macroeconomic impact of financial market turmoil. It believes firmly that changes in its main interest rate should remain consistent with its primary responsibility for combating inflation - rather than bailing out the financial sector.
So far, the euro's appreciation appears not to have undermined significantly its underlying optimism about eurozone growth prospects. Lorenzo Bini Smaghi, ECB executive board member, emphasised in a speech in Paris on Friday that the central bank watched effective exchange rates, which take into account the relative importance of countries in trade and have moved less dramatically than the dollar-euro rate.
Ken Wattret, economist at BNP Paribas, said that the composite purchasing managers' index "has shifted from a level consistent with policy tightening to a level not far above that consistent with rate reductions in the past?.?.?.we should be focusing on whether the next move in ECB interest rates is down, not up".
FRANKFURT: The eurozone economy has this month suffered its biggest jolt since the aftermath of the September 2001 terrorist attacks, with global financial turmoil hitting the services sector particularly hard, according to a closely watched survey.
The unexpectedly steep fall on Friday in the eurozone purchasing managers' index - the third consecutive monthly drop - could knock policymakers' previous confidence that the 13-country eurozone economy would escape largely unscathed from the US subprime mortgage crisis.
Although the slowdown may prove temporary - and the survey showed companies continuing to take on staff at a rapid rate - it coincides with the euro's rise to record levels against the dollar and on a trade-weighted basis, which will hit eurozone exports.
The European Central Bank will see the survey data adding to uncertainty over the outlook and reinforcing its recently adopted "wait and see" stance towards interest rate increases.
But financial markets have started speculating that the next ECB interest rate move will be downwards.
Friday's data showed the fastest deceleration in eurozone service industry growth in the survey's nine-year history, almost certainly reflecting problems faced by the finance sector. In manufacturing, the slowdown was less steep but still bore the effects of higher eurozone interest rates over the past two years as well as the stronger currency.
The global credit squeeze "was not just a shock to confidence but is having serious repercussions on the real economy", said Jacques Cailloux, economist at the Royal Bank of Scotland, which releases the survey in conjunction with NTC economics.
The composite purchasing managers' index - intended as a guide to activity in both the manufacturing and services sector - dropped from 57.4 in August to 54.5 in September. That was the biggest drop since October 2001 and indicated the slowest growth for two years.
Earlier this month, the European Central Bank shelved a planned rise in eurozone borrowing costs pending more information on the macroeconomic impact of financial market turmoil. It believes firmly that changes in its main interest rate should remain consistent with its primary responsibility for combating inflation - rather than bailing out the financial sector.
So far, the euro's appreciation appears not to have undermined significantly its underlying optimism about eurozone growth prospects. Lorenzo Bini Smaghi, ECB executive board member, emphasised in a speech in Paris on Friday that the central bank watched effective exchange rates, which take into account the relative importance of countries in trade and have moved less dramatically than the dollar-euro rate.
Ken Wattret, economist at BNP Paribas, said that the composite purchasing managers' index "has shifted from a level consistent with policy tightening to a level not far above that consistent with rate reductions in the past?.?.?.we should be focusing on whether the next move in ECB interest rates is down, not up".