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Songs Of Euro Zone Back In Recession

 March 22, 2012 10:38 AM


It appears that the day is loaded with negative sentiments. First it was China that dragged down global sentiments with its manufacturing data. Then the Euro Zone continued it with its private sector manufacturing data dampening the sentiments. Both the data will have impacts in the markets and the policy makers will be pressured to take some concrete measures to ease the unfavorable sentiments.

Euro Zone composite index slipped to 48.7 in March from 49.3 in February, data from Markit Economics' initial estimate indicated. This index is based on poll from purchasing managers of industries and services. This is in contrast to the expectation of an improvement to 49.6. Anything below 50 is considered a contraction.

The Euro area has contracted at a much faster rate in March indicating that the area has slipped back into recession. This is because of  output falling in the fourth quarter of 2011 and in the first quarter of 2012.

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After 2009, the Euro Zone recorded a 0.3 percent fall in GDP for the fourth quarter of 2011 and the first quarter will also see a drop in GDP. The European Commission predicted the region will witness a 0.3 percent contraction in 2012. Interestingly, the European Central Bank sees economic activity falling 0.1 percent in 2012 compared to its earlier projection for an expansion of 0.3 percent.

After seeing positive signs of a return to growth in January, the latest data is a big disappointment not only for the Euro Zone, but also for the global markets. This will put pressure on the policy makers to come out with fresh initiatives to revive economic optimism in the region.

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The Euro area's flash manufacturing index of purchasing managers dipped to a three-month low. Service activity index also slipped to 48.7 from 48.8 in February, which is lowest in four months time. Economists were predicting for a reading of 49.2.

However, there is hope that conditions will improve if confidence of business improves in the service sector. The optimism stems from the mild downside in the PMI suggesting a fall in GDP to approximately 0.1 – 0.2 percent.

Various ECB initiatives have been pit in place to bring the Euro zone back on a growth path. As part of its efforts, ECB released more than $1.3 trillion to various banks to manage the credit crisis and spur economic development.

Though Germany's private sector output grew,  it still reached three-month low. In France, output slipped slightly, making it the first time that France is recording a fall in four months time.

Last month, Germany produced better than expected GDP numbers for the fourth quarter. France joined by posting higher than predicted GDP. This was on the back of German investor optimism index recording strong upside to 5.4 points for February on top of a minus 21.6 points in January.

Germany's GDP slipped 0.2 percent in the fourth quarter versus the third quarter. This was better than economists' estimation of 0.3 percent fall. Its third quarter growth was revised to 0.6 percent over 0.5 percent. Similarly, France recorded 0.2 percent growth in GDP for the fourth quarter. This was considerably better than 0.2 percent drop predicted by economists. This was a total surprise to many economists both within the region as well as outside.

The GDP data has allowed economists to express optimism about the economy gaining momentum during the second part of the year though the first half will continue to be plagued by contrasting signals.

However, other nations such as Portugal, Italy, Greece, Belgium and the Netherlands slipped into recession weighed down by the debt crisis. Dutch and Italy's GDP slipped 0.7 percent, while Spain and Austria disclosed fall in its GDP. The euro economy consists of 17 countries.

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