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News : EU Economy Last Updated: Oct 6, 2010 - 12:01:48 PM


Slowest expansion of Eurozone services for 6 months; Dips in Spain and Ireland; Robust growth in France and Germany
By Finfacts Team
Oct 5, 2010 - 9:04:53 AM

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Source: Markit

The final Markit Eurozone Services Business Activity Index fell to a six-month low of 54.1 in September, down from 55.9 in August but above the earlier flash estimate of 53.6. Business activity has now risen in each of the past 13 months. The slowdown was broad-based by nation, with PMI (Purchasing Managers' Index) activity indexes falling in each of the countries covered by the survey and contractions in Spain and Ireland. However, wide national disparities remained firmly evident, with recovery dependent upon France and Germany.

France recorded by far the fastest expansion of business activity in September, despite the rate of increase slowing to a six-month low, followed by Germany, although growth here eased sharply to its weakest since June. Italy saw only a modest increase in activity, while Ireland rejoined Spain (which had posted a decline during August) in contraction territory.

New business rose for the thirteenth month running in September. Although the rate of expansion slipped to a three-month low, it was in line with the post-recession average. France and Germany saw the fastest expansions in new work – with France outpacing the other nations by some distance – but both saw slower growth than in August. Italy posted a slight rise in new business and was the only nation to see faster growth. In contrast, new work in Spain declined at the sharpest rate so far in 2010 and Ireland saw renewed contraction.

Capacity and employment

Service sector employment increased for the fifth successive month, although the rate of job creation was only slight. Moreover, growth was limited to France and Germany, whose rates of job creation remained close to post-recession peaks. Employment was cut in Italy, Spain and Ireland. Spain saw staffing levels fall at the fastest pace since January, while Italian service providers cut jobs following a slight increase in August. Meanwhile, the pace of reduction in Ireland slowed to the joint-weakest in the current 31-month period of decline.

Confidence

Confidence regarding levels of business activity in one year’s time rose to a five-month high in September, and was further above the long-run average seen prior to the financial crisis. The improvement in confidence was mainly centred on France and Italy, where optimism hit 80- and five-month highs respectively. Optimism fell in Germany (although, like France and Italy, remained above its pre-recession long-run average), as well as in Spain and Ireland (dropping well below long-run averages).

Prices

Average costs rose for the tenth consecutive month in September, reflecting higher purchase prices and increased staff costs. The rate of inflation was slower than in August and below the earlier flash estimate, but still above the post-recession average. Costs rose in France, Germany, Italy and Spain, whereas Ireland reported a further decline. However, only Germany saw faster cost inflation than in the previous month.

Strong competition prevented Eurozone service providers from passing on higher costs to their clients. Average charges were lowered for the twenty-third month running and, although still only modest, the rate of reduction was faster than in the previous month. Only Germany reported an increase in output prices, while Ireland and Spain saw the steepest rates of decline.

Chris Williamson, chief economist at Markit said: "The Eurozone service sector recovery showed further signs of waning in September, but reassurance can be gained from the fact that the overall rate of expansion remained robust by historical standards. Whereas the survey was consistent with private sector services expanding at a quarterly rate approaching 1% earlier in the year, this looks to have slowed to around 0.6%-0.7%, a rate in line with the long-run average seen prior to the financial crisis.

"However, with Ireland and Spain now both reporting falling activity levels, and growth all but stalled in Italy, the recovery is looking increasingly lop-sided and all-too dependent on France and Germany.

"Although business confidence picked up to a five-month high, this was not accompanied by an increase in job creation, which remains particularly disappointing as job losses in Italy, Spain and Ireland offset improvements in France and Germany. The failure to generate jobs is likely to hinder growth of consumer spending in coming months."

The Eurozone Services PMI (Purchasing Managers' Index) is produced by Markit and is based on original survey data collected from a representative panel of around 2000 private service sector firms. National data are included for Germany, France, Italy, Spain and the Republic of Ireland.

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