Eurozone Economy Shrinks In Q2; Private Sector Output Contracts in August

(RTTNews) - Driven by factors including deteriorating external environment and surge in oil and food prices, the Eurozone economy contracted in the second quarter for the first time since the launch of Euro nearly a decade ago, a report from the Eurostat confirmed on Wednesday. Elsewhere, a survey revealed that Eurozone’s private sector activity continued to shrink in August.

In its first estimates for the second quarter, the Eurostat announced that the 15-nation economy contracted 0.2% quarter-on-quarter in the second quarter, matching the preliminary estimate and reversing a 0.7% expansion recorded in the first quarter. This was also the first contraction since records began in 1995.

At the same time, the statistical office revised the annual growth rate for the second quarter to 1.4% from 1.5%. This follows 2.1% increase in the first quarter. Economists had expected growth figures for the second quarter to match the preliminary estimate.

During the second quarter, the US economy had expanded 0.8% and Japan GDP fell 0.6%.

Conditions in Eurozone worsened in the recent months, underpinned by various factors like deteriorating external environment, the strength of the euro, the surge in oil and food prices, and last but not least, the tightening of monetary and credit conditions, an economist at BNP Paribas said.

In the second quarter, household consumption declined 0.2% quarter-on-quarter after recording zero growth in the previous quarter. At the same time government final consumption expenditure increased 0.5%, quicker than 0.3% rise seen in the prior quarter. Gross fixed capital formation dipped 1.2%, reversing a 1.5% rise in the first quarter. At the same time, exports and imports dropped 0.4% each in the second quarter. The contribution of net exports to GDP growth was nil.

A latest survey from the Markit Economics showed that the final Composite Output Index stood at 48.2 in August, up from 47.8 in July. The indicator stood above the flash reading of 48, signaling a slight moderation in the pace of decline of output from a six-and-a-half year low reported in July.

However, the index continued to stay below the neutral level of 50. A reading below 50 suggests contraction in private sector activity, while a reading above 50 indicates expansion.

According to the survey, output declined in both manufacturing and service sector. Among the big-four euro nations, only Germany reported an increase in output. The private sector activity declined in all other big nations namely France, Italy and Spain. Meanwhile, volume of new business dropped across each of the big-four nations for the first time since April 2003.

Encouraging firms to reduce its staffing levels, backlogs of work slid for the fifth month in a row. Accordingly, employment dropped in August and the rate of job losses accelerated to the sharpest since February 2004. Again, Germany was the only big-four nation to show employment growth.

Further, the report showed that average input cost inflation dropped back in August from July’s eight-year high, and average output price inflation eased from the record high reported in the prior month.

Markit Chief Economist, Chris Williamson said, “The rise in the headline Eurozone PMI number masks a darker picture that is emerging from the constituent national data. The moderation in the overall rate of decline in August was due merely to easing from rapid rates of decline in Spain and Italy, rather than any signs of growth picking up in France or Germany.”

The final Markit services Purchasing Managers’ Index, or PMI came in at 48.5 in August, slightly higher than the flash estimate of 48.2 and July’s 48.3. The indicator suggests a marginal easing in the pace of decline in August.

Meanwhile, the German Markit services PMI stood at 51.4 in August, up from the earlier flash reading of 50.6. The Markit/CDAF French PMI for the service sector signaling a moderate contraction showed a reading of 48, slightly lower than the flash estimate of 48.5.

At the same time, the Italian services PMI rose to 48.5 from July’s 45.6, the survey conducted by Markit Economics and ADACI reported. Marked downturn in Spanish service sector continued in August. The services PMI for Spain came in at 39 versus 37.1 in July.

A separate report published by the statistical office showed that retail sales in Eurozone declined for the second consecutive month in July from the prior month. Retail sales declined 0.4% month-on-month in July, following a 0.9% decrease in June. The statistical office has downwardly revised June’s monthly retail sales number from negative 0.6%.

On an annual basis, the retail sales index in EU15 dropped 2.8% from the prior year and compared with a revised 3.2% decrease in June. Economists had anticipated just 2.1% annual fall in retail sales.

Among the member states for which data are available, total retail trade rose in eleven member states and fell in seven in July from the prior year. The highest increases were witnessed in Romania with 18.4%, followed by Slovakia and Poland. At the same time, Latvia reported the largest decline in sales volume.

In EU27, retail sales edged up 0.1% month-on-month, after declining 1.2% in June. Meanwhile, retail trade volume fell 1.1% in July, better than the 1.2% drop seen in the previous month.

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