October 24, 2012

Eurozone Downturn Worse Than Expected

PMI lowest in over three years as gloom spreads

A slowdown in business in the eurozone was worse than expected in October, with a purchasing managers’ index indicating a lack of confidence leading to additional job losses and hitting its lowest level since the region came out of its last recession more than three years ago.

Reuters reported Wednesday that Markit’s Composite Purchasing Managers' Index (PMI) dropped in October from September’s 46.1 to 45.8. A Reuters poll of experts had predicted the PMI to rise instead to 46.4. A Bloomberg survey had been even more optimistic, expecting an increase to 46.5.

Even Germany and France are suffering, with the composite PMI for Germany under 50—the mark considered the dividing line between contraction and expansion—for the sixth straight month. In France, it was even worse, logging its eighth straight month under 50.

"It's very disappointing, it's a depressing scenario as things are getting worse," said Chris Williamson, chief economist at Markit, in the report. He added, "We are more downbeat than the official data. The PMIs are running at levels in the third quarter and start of the fourth quarter historically consistent with GDP falling at about 0.6%."

Williams also said that although official data seemed to indicate a less drastic Q3 decline of 0.2%–0.3%, the PMIs suggest instead that the downturn would accelerate into the current quarter. In Q2, the economy shrank 0.2% and predictions put additional contraction in Q3 at 0.3%, which satisfies the technical definition of a recession.

As businesses wallow in gloom, they are cutting their workforces for the tenth month in a row and boosting unemployment rates. Earlier in October, August figures were released indicating that unemployment for that month was at 11.4%, the highest level since the formation of the eurozone in 1999.

"There is nothing specific that is making businesses gloomier—it is a much more general widespread gloom," Williamson said in the report, adding, "Businesses are very much in cost-cutting, retrenchment mode, battening down the hatches because they don't know what the outlook is."

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