Euro-Area Surveys Show Slowdown Putting Pressure on ECB

Euro-area manufacturing and services growth unexpectedly slowed to the weakest pace this year, increasing pressure on the European Central Bank to add stimulus to the economy.

Purchasing Managers Indexes for both industries fell and a composite gauge dropped to 52.3 in September from 52.5 in August, London-based Markit Economics said today. Economists in a ForexSQ survey predicted an unchanged reading. A manufacturing gauge for China published today rose.

ECB President Mario Draghi pledged yesterday that officials will become more active in their fight to restore growth, saying the recovery is losing pace and risks are “clearly” to the downside. The currency bloc’s economic expansion halted in the second quarter as its three largest economies failed to grow and inflation slowed to the lowest level in almost five years.

“Growth momentum is very weak,” said Martin van Vliet, senior economist at ING Groep NV in Amsterdam. “Fortunately, the ECB is well aware of the need for further stimulus and has expressed an intention to increase its balance sheet.”

The Stoxx Europe 600 Index slid 1.1 percent to 343.01 at 11:12 a.m. Frankfurt time. The euro was 0.2 percent higher at $1.288.

ECB Action

Markit also released indexes showing manufacturing and services shrank in France, while in Germany factory activity cooled to the slowest pace in 15 months. A gauge of new orders for the euro area slipped to 51.2 this month, from 52.4 in August, the data showed. An index of services growth slowed to 52.8 from 53.1 and manufacturing fell to 50.5 from 50.7.

In China, a flash reading of a manufacturing purchasing managers’ index published by HSBC Holdings Plc and Markit climbed to 50.5 in September from 50.2, with new export orders rising to the highest level since March 2010. Economists predicted a decline to 50.

The ECB is moving to a more “active and controlled management of our balance sheet,” Draghi said in his quarterly testimony to European lawmakers in Brussels yesterday. “Recent indicators gave no indication that the sharp decline” in economic activity in the region has stopped, he said.

The central bank has cut interest rates to record lows and said it will buy asset-backed securities and covered bonds. Draghi said that policy makers can implement more stimulus if required.
Confidence Drop

“Outright purchases will increase the size of the ECB’s balance sheet,” he said. “We stand ready to use additional unconventional instruments within our mandate, and alter the size and/or the composition of our unconventional interventions should it become necessary.”

The ECB currently has a policy of meeting all banks’ demands for liquidity, meaning that lenders determine how much central-bank cash they take. Draghi reiterated yesterday that he intends to expand the balance sheet to the levels seen at the start of 2012, signaling an addition of as much as 1 trillion euros ($1.3 trillion) in assets.

Confidence has declined in recent months as tensions with Russia threaten trade. The Munich-based Ifo institute’s business climate index for Germany, due for release tomorrow, is forecast show sentiment at companies fell to the lowest in 16 months in September.
ECB Forecasts

“Concerns about the Ukraine crisis, related Russian sanctions and worries about the single currency area’s general economic plight appear to be having an increased impact on the euro-zone economy,” said Chris Williamson, an economist at London-based Markit. “The danger is that the ECB’s efforts to stimulate the economy will prove ineffective in the face of such headwinds, which are exacerbating already-weak demand.”

Companies’ selling prices fell in September, the Markit data showed, while input costs rose at the weakest rate since May. Figures last week showed that euro-area inflation held at 0.4 percent in August, the weakest pace in almost five years. That compares with the ECB’s goal of just below 2 percent.

The central bank trimmed its forecast for euro-area economic growth in September. It now predicts expansion of 0.9 percent this year and of 1.6 percent in 2015.

“The internationally exposed industrial sector still bears the brunt of the Putin factor,” said Christian Schulz, senior economist at Berenberg Bank in London. “The data highlight the downside risk to the ECB’s latest economic forecasts and should fuel the debate about making the asset purchases, which will be unveiled in October, as aggressive as possible.”

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