Europe's Services, Manufacturing Recession Worsens

By Fergal O'Brien

Nov. 21 (Bloomberg) -- Europe's manufacturing and service industries contracted in November at the fastest pace in at least a decade, putting pressure on the European Central Bank to step up the pace of interest rate cuts.

Royal Bank of Scotland Group Plc's composite index dropped to 39.7, the lowest since the survey began in 1998, from 43.6 in October. Economists forecast a decline to 42.8, according to the median of 16 estimates in a Bloomberg survey. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.

Europe's economy fell into its first recession in 15 years in the third quarter after the worst financial crisis since the Great Depression pushed up lending costs, hurt export demand and eroded confidence. The ECB has cut its benchmark rate by 1 percentage point to 3.25 percent since early October and signaled more cuts are ahead.

``The data strengthen the case for a more aggressive ECB response,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London. ``The chance that the ECB may cut interest rates by 75 basis points instead of the expected 50 basis points at its December meeting continues to rise.''

The euro, which has dropped 15 percent in the past two months, rose 1 percent to $1.2574 today.

ECB President Jean-Claude Trichet, who said this week the world is experiencing its worst financial crisis in six decades, may give investors clues on his intentions when he gives a speech in Frankfurt at 2 p.m. local time.

Pragmatic

The central bank's board, which met yesterday to reassess the economic outlook, has never cut rates by more than 50 basis points.

``We have to be totally pragmatic and to stick to facts and figures,'' Trichet said in London on Nov. 18. ``We said in the last press conference, it was not excluded that we would continue to lower rates.''

Markit's manufacturing index dropped to 36.2 from 41.1 in October, while the services gauge fell to 43.3 from 45.8. Separate figures today showed that French consumer spending on manufactured goods slipped the most in four months in October.

Some council members have expressed concern that larger rate cuts may unsettle markets. Yves Mersch said in an interview with Dow Jones conducted Nov. 18 that such a move would hurt ``confidence'' and Austria's Ewald Nowotny told Market News International that the ECB wants to preserve ``firing power.''

`No Doubt'

``We have no doubt that the current exceptional circumstances require a bold ECB move next month, probably twice the 50 basis point cut we have penciled in,'' said Marco Valli, an economist at Unicredit MIB in Milan. ``However, as appears clear from recent rhetoric, many at the ECB still think that large rate cuts can be counterproductive.''

As companies across Europe face weakening demand, they're finding it more difficult to raise prices and are cutting jobs. The index of manufacturing employment fell at a record pace this month and the gauge for services jobs dropped the most in five years. The report also showed that prices charged in both industries declined.

``Owing to a remarkable decline in inflationary pressures in the medium term and rapidly deteriorating economic prospects, euro-area monetary policy in my view has enough leeway for further easing if necessary,'' ECB council member Axel Weber said at a banking conference in Frankfurt today.

Outlook Worsens

The slump isn't confined to the euro region. U.K. automobile production declined 25 percent in October to the lowest level in that month since 1991. Japan's economy will probably shrink this year and next in the first back-to-back contractions in a decade, according to economists surveyed by Bloomberg News.

In the U.S., the index of leading economic indicators fell more than forecast in October, signaling a deepening recession.

As the economic outlook deteriorates, the European Union is crafting a coordinated stimulus package to spur its 27-nation economy. In Germany, the government will expand its 2009 net borrowing requirement to 18.5 billion euros ($23.3 billion) from an earlier forecast of 10.5 billion euros as it stretches the budget to pay for programs to stabilize the economy.

Shrinkage

``Our forecast for next year suggests that the euro area will experience its worst recession in more than 50 years,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London. He expects the euro region's economy to contract 1.5 percent next year.

BASF SE, the world's largest chemical company, this week lowered its profit forecast for the second time and said it plans to idle 80 factories after customers reduced orders.

It's not just manufacturers that are feeling the pinch. Air France-KLM Group, Europe's biggest airline, has limited capacity increases this winter and next summer to no more than 2 percent as passenger demand cools. Ryanair Holdings Plc is paring costs by grounding planes at London Stansted and Dublin airport.

Today's figures ``will come as a shock to the ECB,'' said Dominic Bryant, an economist at BNP Paribas in London. ``Aggressive action is needed.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.