Euro zone slump deepens unexpectedly in April

Reuters: The euro zone’s business slump deepened at a far faster pace than expected in April, suggesting the economy will stay in recession at least until the second half of the year.

Chinese factories enjoyed their best performance this year, the latest purchasing managers indexes (PMIs) also showed on Monday, but economists focused on the euro zone’s grim outlook which was worse than any projection in a Reuters poll.

The Markit PMI fell to 47.9 from 49.2 in March, a five-month low and confounding the forecast for a rise to 49.3.

Optimism from this weekend’s deal to boost the International Monetary Fund’s crisis-fighting firepower quickly evaporated and worried investors sold the euro and bought safe-haven German and U.S. government bonds.

“Today’s dismal PMI figures clearly indicate that the euro zone economy remains in dire straits,” said Martin Van Vliet, senior economist at ING.

“Our base case scenario is still for a gradual return to modestly positive growth in the second half of this year, but with the lingering debt crisis and the ongoing drag from fiscal policy, the risks are clearly skewed to a more protracted recession.”

European factories had their worst month since June 2009. Companies said their order books were shrinking and they were cutting jobs in reaction to falling demand.

The overall index slipped further below the 50 threshold that divides growth from contraction.

Politics added to the sense of concern about Europe on Monday. France’s presidential election was thrown wide open by the surprisingly high score of a far-right candidate in the first round vote while the Dutch government was set to resign in a crisis over budget cuts.

The United States is the only Western economy making a significant contribution to global economic growth but surprisingly weak employment data last week raised questions about whether this will continue.

“We’ve been operating under the assumption the U.S. economy is getting back on its feet, but there’s a clear fear that if other parts of the world are losing momentum, that’s going have an impact on the United States too,” said Commerzbank economist Peter Dixon.

Chinese factories at least showed some signs of improvement in April with readings for output and export orders perking up. The HSBC Flash PMI supported the view that China’s growth rate bottomed out in the first quarter of the year.

The overall index, the earliest indicator of China’s industrial activity, recovered slightly to 49.1 in April from a final reading of 48.3 in March, but still below the 50 level that separates economic growth from contraction.

Industrialised and emerging nations promised another $430 billion to boost the IMF’s lending power this weekend, doubling the size of its war chest to fight crises in case Europe’s problems worsen.

Global finance chiefs pressed Europe to put in place economic reforms needed to extinguish its sovereign debt crisis, with an increasing sense that the euro zone will have to do more to encourage economic growth instead of just cutting budgets.

The PMIs pointed to worsening demand for goods, with order books shrinking at a faster rate in April.

“There are no real drivers of growth here, which suggests that although the overall rate of decline is modest at the moment, we could see it continue to worsen in coming months,” said Chris Williamson, chief economist of PMI compiler Markit.

Economists polled by Reuters last week estimated the euro zone economy shrank 0.2 percent in the first quarter, and will decline 0.1 percent this quarter.

Williamson also highlighted the very severe contraction taking place in euro zone economies outside the two largest, France and Germany, raising questions about the effectiveness of harsh austerity measures.

“Tax revenues are going to be low, and unemployment is going to carry on rising, so are these deficit fighting policies working?” he said.

The euro zone’s manufacturing PMI also came in below all forecasts from economists, plumbing 46.0 in April - its lowest reading since June 2009 and down sharply from 47.7 in March.

On the plus side, the factory PMIs suggested inflation pressures are easing following a rise associated with oil prices earlier in the year, with the output price index hitting a six-month low of 50.5, from 51.2 in March.

“It does suggest that policymakers ought to be more concerned about the growth outlook than the inflation outlook at the moment. Demand is so weak that companies just can’t push through price rises,” said Williamson.