Economy & Finance

France drags on euro zone economy, Britain brighter

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LONDON (Reuters) – A huge drop in French business activity meant the euro zone’s recession dragged on in March but British services firms provided a rare glimpse of economic sunshine, posting their best month since August.

Business surveys on Thursday showed the decline in French services businesses is now at its steepest since the nadir of the 2008-09 recession, outstripping even the downturns of struggling Spain and Italy.

In Germany, the region’s biggest and most resilient economy, growth slowed to a near-stall last month.

Unusually, Britain bucked the trend after rising new orders helped services companies like banks, hotels and restaurants record their fastest growth since last summer’s London Olympics.

Overall though, the latest batch of purchasing managers indexes (PMIs) showed most of Europe’s major economies, at least in the euro zone, fared poorly in the first quarter of the year.

“With these PMI readings, we’re likely to be in contraction territory even for the second quarter,” said Juergen Michels, lead euro area economist at Citi in London.

Despite the clear economic weakness, economists do not expect the European Central Bank to announce any major easing of monetary policy this Thursday.

But the accumulation of dismal data could prompt a more dovish tone from ECB President Mario Draghi, who in January identified “positive contagion” sweeping through financial markets as a result of his policies.

“This positive contagion we’re seeing in financial markets is not feeding through to real economic activity,” said Michels, pointing out that financing conditions are not improving for households or medium and smaller companies across the region.

Markit’s Eurozone services PMI fell to 46.4 in March from 47.9 in February. It has spent all but one of the last 20 months rooted below the 50 threshold dividing growth from contraction.

It was also down a tick from a preliminary reading of 46.5 reported two weeks ago.

That at least suggested the mishandling of Cyprus’s 10 billion euro bailout at the end of March had no immediate impact on the private economy, survey compiler Markit said.

But it added that anecdotal evidence suggested the Cyprus debacle had still had a disquieting effect.

“The recession is deepening once again as businesses report that they have become increasingly worried about the region’s debt crisis and political instability,” said Chris Williamson, chief economist at Markit.

The poor PMIs piled pressure on the euro on Thursday, while the yen sank across the board after the Bank of Japan unveiled a set of bold easing measures.


The dismal French PMI boded ill for the euro zone’s No.2 economy for the next quarter at least.

The Markit services purchasing managers’ index fell in March for the eighth month running to 41.3 from 43.7 in February, hitting its lowest level since February 2009.

“The very weak support readings for the president (Francois Hollande) suggest it will be very difficult to go ahead with far-reaching structural reforms that are likely to lift productivity growth in the economy anytime soon, said Michels at Citi.

French consumer spending and budget deficit data last Friday highlighted the enormous task facing the government, which insists it can meet its pledges to revive growth and the public finances.

By contrast, the British services PMI added to some early evidence the UK economy could narrowly avoid a third recession in five years.

The main Markit/CIPS Purchasing Managers’ Index (PMI) for the dominant service sector climbed to 52.4 in March from 51.8 in February.

“Nonetheless, we are concerned that bad weather in January and March could impact on the GDP calculations, so we still think it will be 50-50 on whether the UK does indeed post a positive Q1 GDP number,” said James Knightley, senior economist at ING in London.

(Editing by Catherine Evans)

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