Blow to eurozone recovery hopes

The eurozone’s economic recovery has run into resistance this month, according to data on Thursday that cast doubt on the pace of growth across the 16-country region.

Purchasing managers’ indices for this month showed the first overall drop since they started to rebound last February, adding to fears that the robust expansion in economic activity in the second half of last year is not being maintained.

The data followed a warning this week by Jürgen Stark, a European Central Bank executive board member, that growth in the first half of 2010 would be weaker than in the previous six months, although he did not foresee a “double dip” recession.

January’s purchasing managers’ indices showed eurozone manufacturing activity expanding at the fastest for almost 22 months. However, service sector growth weakened and the “composite” index, covering both sectors, stood at 53.6, down from 54.2 in December. A level above 50 indicates an expansion.

The eurozone economy had moved out of recession by the third quarter of 2009, when it grew 0.4 per cent. But the end of government help for car sales, weak banking sector and rising unemployment are all likely to have taken a toll on domestic demand, particularly in Germany.

The crisis over Greece’s public finances has meanwhile increased financial market nervousness and helped drive the euro sharply lower.

However, the latest reading did not suggest the recovery had been blown off course, said Chris Williamson, chief economist at Markit, which produces the indices. “It is a very confusing situation at the moment, but the underlying message is that there is momentum there, especially in manufacturing.”

Adding more comfort, the purchasing managers’ indices again showed an easing in the pace at which jobs were being cut to the slowest since October 2008. Manufacturers, meanwhile, reported the largest increase in new orders since July 2007. Export orders rose at the same pace as in December, which was the fastest for more than two years.

Economic activity in January was probably hit by the severe weather, Mr Williamson said, and the rate of growth was “in line with the average seen in the final three months of last year, which was the strongest quarter for two years”.

One risk is that the indices are overstating the pace of growth. Germany’s statistical office last week reported that its economy had stagnated in the last quarter of 2009.

Gilles Moec, European economist at Deutsche Bank, said the weak performance of countries such as Spain and Greece continued to drag down the eurozone’s overall prospects. But rather than the recovery going into reverse, it was seeing “a normalisation after an exceptional catch-up last summer”.