The euro zone has returned to recession, according to a
prestigious survey closely watched by central bankers and
Output in the currency union has fallen for the second
straight month, according to the March Purchasing Managers'
Index (PMI) published by Markit Economics and
the decline has accelerated.
The news will reawaken the debate about whether the European
Central Bank and euro zone politicians are doing enough to save
the economy from a serious slump.
Chris Williamson, chief economist at Markit, said, The
further drop in the PMI is clearly a disappointment following
the brief return to growth seen in January and suggests that
policymakers will need to seek ways to revive economic growth
across the region again.
The March PMI numbers painted a less sunny picture than
before for Germany and France, which largely caused the
deterioration in the euro zone as a whole. In particular, the
powerful German manufacturing sector has put in a disappointing
performance. Output showed anemic growth this month after a
strong showing in February.
The composite index of output for the euro zone as a whole,
including both manufacturing and private-sector services, fell
to 48.7 from 49.3. Any figure below 50 means a contraction in
The PMI figures suggest that the euro zone has entered
recession most commonly defined as two
straight quarters of falling output. Official figures show a
0.3 percent decrease in euro zone gross domestic product (GDP)
in the fourth quarter of last year. Economists said the Markit
PMI numbers for January to March indicate a further fall in the
first quarter of 0.1 percent or 0.2 percent.
This adds up to a mild recession (in contrast to the deep
recession of 2009). Markits March survey of purchasing
managers, however, has set economists and investors fretting
about two worrying questions: how long will the recession last,
and what are policymakers willing and able to do to end it?
The volume of new business fell at its sharpest pace since
December, the survey suggests, pushing backlogs of work down
for the ninth straight month. This indicates that output could
fall again in April. Companies continued to reduce headcount in
March a sign that they do not see a quick end to
In the short to medium term, politicians power to end
the decline in output is extremely limited. Last years
abrupt rises in euro zone sovereign bond yields forced most
member states to trim government budgets sharply in order to
bring yields back down by restoring fiscal credibility. Falling
output is more likely to prompt politicians to reduce spending
even further rather than increase it, since declining economic
activity increases fiscal deficits by reducing tax revenue. Yet
the politicians seem to have ruled out Keynesian measures to
use government spending to stimulate demand. Euro zone
governments current attempts to boost economic
growth through improving access to the
professions and cutting bureaucratic burdens on business, for
example are likely to boost GDP only in the
The ECB will be reluctant to cut the cost of borrowing any
further, given the recent stubborn refusal of euro zone
inflation to fall further towards the 2 percent level, which it
regards as the maximum acceptable level. Inflation was 2.7
percent in February for the third consecutive month.
Stella Wang, European economist at Nomura in London, said
the PMI report increases our conviction that the
ECB will keep its benchmark interest rate at 1 percent. She
concluded, With headline inflation currently set to
remain above 2 percent throughout 2012, a rate cut at this
stage would be a tough sell.
The ECB has the alternative option of resorting to
unconventional measures to boost the economy. Many analysts
think its December decision to offer unlimited three-year
funding to euro zone banks through its long-term refinancing
operation (LTRO) saved the region from another credit crunch,
which would have ushered in a recession perhaps even deeper
than the slump that followed the crunch of 2008. The ECB lent
hundreds of billions of euros once again at the end of February
through a second three-year LTRO.
But it looks unlikely that the ECB will take such radical
action again unless the euro zones economic plight
becomes considerably worse. Mario Draghi, the ECB president, is
facing criticism from officials at the
Bundesbank Germanys conservative and
powerful central bank over the unconventional
measures taken so far. He might find it politically impossible
to go further down the same road. In any case, economists argue
that the two LTROs have already done all that can be expected
of them: they have saved the currency unions banks from
going bust. These economists say that as long as demand in the
real euro zone economy remains so low, banks will be reluctant
to use the new funds to boost output by lending to businesses.
In any case, the ECBs latest survey of bank lending
suggests that demand among businesses for bank loans remains
tepid because of the uncertain economic outlook.
The Eurofirst 300 index of euro zone stocks responded to the
weak PMI data by dropping 1.1 percent to 1,079 on Thursday.
Yields on the benchmark Italian 10-year bond which is
sensitive to any signs that a weakening euro zone economy will
make the governments debt burden unsustainable
rose by 10 basis points to 5.09 percent.