Europe Manufacturing, Services Expansion Accelerates

By Simone Meier

Nov. 23 (Bloomberg) -- Europe’s services and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession in more than 60 years.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today in a statement. That was the highest since November 2007. A reading above 50 indicates expansion.

The European economy is gathering strength after global governments spent billions on stimulus measures to encourage spending. While euro-area exports increased the most in more than a year in September, the euro’s strength is making goods less competitive abroad just as rising unemployment undermines consumer spending, threatening the recovery.

“It’s another pretty solid reading,” said James Nixon, European chief economist at Societe Generale SA in London. “It shows that the recovery is being sustained from the third quarter into the fourth.”

An index of services rose to 53.2 from 52.6, Markit said. A gauge of manufacturing increased to 51 from 50.7.

Governments around the world have spent $2 trillion to fight the recession and the European Central Bank has cut its key interest rate to a record low of 1 percent and purchased covered bonds to stimulate bank lending. ECB President Jean- Claude Trichet said on Nov. 17 that the bank expects the euro- area economy to recover only “at a gradual pace” in 2010.

Benchmark Bond

The euro was little changed against the dollar on the report, trading at $1.4971 at 9:53 a.m. in London, up 0.7 percent on the day. The yield on the German 10-year benchmark bond rose 0.3 basis point to 3.27 percent.

Adding to signs of recovery, European investor confidence rose for a fourth month in November and industrial output also increased in September. In Germany, where Chancellor Angela Merkel’s government is spending 85 billion euros ($127 billion) to boost Europe’s largest economy, business confidence rose to the highest in 13 months in October.

German Finance Minister Wolfgang Schaeuble said on Nov. 20 that the nation’s economy will probably expand at a weaker pace in the current quarter than the 0.7 percent in the previous three months. Merkel on Dec. 2 will host a meeting to consider additional stimulus measures, according to Schaeuble.

‘Very Optimistic’

Puma AG, the second-largest European sporting-goods maker controlled by Paris-based PPR SA, said on Nov. 17 it expects to be profitable in the fourth quarter. HeidelbergCement AG, Germany’s largest cement maker, said earlier this month that it is “very optimistic” about 2010 and 2011.

The Dow Jones Stoxx 600 Index has risen 24 percent over the past four months, bringing annual gains to 31 percent. Germany’s DAX benchmark has advanced 18 percent this year.

The ECB said on Nov. 12 that professional forecasters expect Europe’s economy to expand 1 percent in 2010 instead of a previously projected 0.3 percent. In 2009, the economy may shrink 3.9 percent, less than the 4.5 percent contraction forecast in August, according to the survey.

“We are approaching recovery, positive territory,” European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said on Nov. 18. Still, “we shouldn’t be over- optimistic.”

Weaker Dollar

The euro’s 18 percent gain against the dollar since mid- February is threatening to curb a recovery and hurting companies including European Aeronautic, Defence & Space & Co. The owner of Airbus SAS said on Nov. 16 that third-quarter earnings slumped 77 percent, partly because of a weaker dollar.

Companies across the euro region continue to cut jobs and reduce costs to help bolster earnings. European unemployment rose to 9.7 percent in September from 9.6 percent in the previous month. That’s the highest since January 1999.

Hugo Boss AG, Germany’s largest clothing maker, expects sales to remain “challenging” in the first half of next year, Chief Executive Officer Claus Dietrich Lahrs said on Nov. 17. The Metzingen-based company may see a “soft recovery” in the U.S. market, while sales in western Europe, the company’s largest market, may stagnate over the coming months, he said.

“The recovery may lack stamina and could well slow early in 2010,” said Howard Archer, chief European economist at IHS Global Insight in London. “There is a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures, and to keep interest rates down at 1 percent until deep into 2010.”

The ECB has already signaled it is in no rush to withdraw stimulus measures as the economy gathers strength. ECB Executive Board member Jose Manuel Gonzalez-Paramo said on Nov. 13 that the exit will be “gradual and opportune.”

“There are many reasons to expect a general recovery in 2010, but it will not be the end of the problems,” ECB council member Guy Quaden said on Nov. 17. “After that we’ll have to face and discuss the problems of an exit strategy.”

To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net