Eurozone Posts Modest Recovery in Output Decline

06 December 2001

According to the Reuters Eurozone Services Business Activity Index, business confidence throughout the Eurozone – Germany, France, Spain, Italy, Ireland, Greece, Austria and the Netherlands – showed a marginal improvement in November, easing upward from October’s nadir.

Key points from the November services sector data compiled by NTC Research are:

Economic output
Total Eurozone private sector economic output contracted for the third consecutive month in November. Nevertheless the rate of decline eased through the month from October’s three-and-a-half-year survey record low.

New orders
Total new orders in the Eurozone private sector economy declined for the eighth consecutive month in November, but at a softer rate than last month. However, the easing represents merely a modest improvement on the survey record rate of contraction seen in October, and the decline seen in November was still the second strongest recorded by the survey to date.

Input prices
These contracted for the second consecutive month in November. Moreover the rate of decline accelerated through the month to the fastest in thirty-three months. Lower fuel prices contributed significantly to the easing, as did falling global demand for raw materials.

Private sector employment levels fell for the second consecutive month in November and at the fastest rate in the survey history. A net loss of jobs was recorded in both manufacturing and service sectors, although manufacturers reported a significantly greater rate of decline than services. With the exception of Greece (which recorded its first decline in manufacturing employment since the series began in May 1999), all of the Eurozone nations covered by this survey recorded an increase in the rate of contraction of employment during the month.

The Business Activity Index rose marginally in November, up from 46.7 in October to 46.9. At a level well below the 50.0 ‘no change’ mark, the index signalled a contraction of activity for the third month running. The rise in the index merely represents a slight easing in the pace of contraction from the three-and-a-half year survey record low of October, when activity levels turned down sharply in the wake of the September 11 attacks.

However, the recent contraction of activity can only be in part blamed on the terrorist attacks and instead largely represents a continuation to the trend of slower growth seen since the index peaked in April 2000.

Business activity growth varied by country, with the rate of decline easing modestly in Germany, Italy and Ireland but accelerating in both France and Spain. Germany recorded the sharpest rate of decline for the seventh consecutive month, while Italy recorded the weakest rate of decline, followed by France and Ireland.

Expectations of business activity levels in twelve months’ time improved very modestly, indicating a slight improvement in business confidence from the October survey low. Although optimists continued to exceed pessimists across the Eurozone as a whole, the overall level of confidence nevertheless remains particularly low by the survey’s historical standards.

The improvement in expectations was linked to a modest easing in the rate of decline of incoming new business, which fell for the third consecutive month in November but, like activity levels, recovered slightly on the survey record rate of decline seen in October. Once again, the continued marked rate of deterioration could not simply be attributed to the September 11 attacks, which only exacerbated a downward trend that has been evident since the Incoming New Business Index peaked in April 2000.

Contrasting with the rises in the activity and new business indexes, employment continued to fall in November, reflecting the continued weakness of demand for services and growing uncertainty regarding future business conditions. The contraction of employment was the second consecutive monthly fall and the largest monthly decline since the index began in July 1998. Only Italy recorded a rise in employment. The sharpest falls were seen in Ireland, followed by Germany.

Weak demand led service providers to cut their charges for the fourth month running in November. The rate of decline was the strongest since May 1999. Pressure on margins was alleviated somewhat by an easing in the rate of growth of input cost inflation to the lowest seen since January 1999.

Slower growth of costs reflected recent falls in oil and fuel prices as well as reduced upward pressure on wages and salaries due to the easing of labour market tightness in recent months.

News source: NTC Research