European Manufacturing, Services Expansion Slows

By Simone Meier

Jan. 21 (Bloomberg) -- Expansion in Europe’s service and manufacturing industries unexpectedly slowed in January, adding to signs the pace of the economy’s recovery may weaken.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro region fell to 53.6 from 54.2 in December, London-based Markit Economics said today in an initial estimate. Economists expected an increase to 54.4, according to the median of 15 estimates in a Bloomberg survey. A reading above 50 indicates expansion.

The euro-region economy may lose momentum as the effect of government stimulus measures tapers off and rising unemployment erodes consumers’ willingness to spend. German investor confidence dropped in January and European Central Bank Executive Board member Juergen Stark said yesterday that euro- area growth in the first half of 2010 may be “somewhat more muted” than in the second half of last year.

“The drop was a little bit stronger than expected,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “We might see more of a sideways development over the coming months. We’re far from a contraction though.”

An index of services dropped to 52.3 in January from 53.6 in the previous month, Markit said. A gauge of manufacturing increased to 52 from 51.6 in December.

‘Bumpy’ Recovery

The euro extended declines against the dollar after the report and was down 0.4 percent at $1.4054 as of 11:10 a.m. in Frankfurt. The yield on the German 10-year benchmark bond rose 0.1 basis point to 3.23 percent.

The ECB this month kept borrowing costs at a record low of 1 percent and President Jean-Claude Trichet predicted Europe’s economy would expand at “only a moderate pace” this year. Stark said on Jan. 20 that the euro region will show a “gradual” and “bumpy recovery.”

“The region faces a still challenging economic environment,” said Howard Archer, chief European economist at IHS Global Insight in London. “There remains a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures.”

Companies may remain reluctant to step up hiring as the euro’s 8 percent ascent against the dollar over the past year threatens to undermine exports by making them less competitive just as surging energy prices pushing up costs. Crude oil prices have more than doubled over the past year to about $78 a barrel.

Forecasts ‘Difficult’

European unemployment rose to the highest in more than 11 years in November. Exports declined for a second month and retail sales fell the most in over a year.

“Forecasts regarding consumer behavior this year are as difficult as forecasts about the exact end of the global economic crisis,” Henning Kreke, chief executive officer of Douglas Holding AG, Europe’s largest makeup and perfume retailer, said on Jan. 13.

Governments around the world have pledged trillions of dollars to fight the worst global recession in more than six decades. In the U.S., the world’s largest economy, industrial production rose for a sixth month in December and consumer confidence increased.

A rebound in exports helped the euro-region economy emerge from a recession in the third quarter, with gross domestic product increasing 0.4 percent. In Germany, Europe’s largest economy, GDP growth accelerated to 0.7 percent in that period.

Alstom SA, the world’s second-largest train maker based in Paris, said on Jan. 19 that it “saw an improvement” in the last three months of 2009. Lanxess AG, Germany’s biggest publicly traded specialty chemicals maker, said it expects 2010 to be “a good year” on reviving demand.

“We continue to have growth in the fourth quarter,” European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said on Jan. 18. “It’s a fragile recovery and we have a level of uncertainty that’s clearly higher than in a normal situation.”

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