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A Sign That Europe May Avoid a Fresh Downturn

German resilience trumps Greek tragedy in latest findings of closely watched purchasing managers’ survey by Markit. But analysts warn that it's too soon to sound the all clear.

Euro zone businesses have begun the year by battling back into growth territory after four months of decline, according to a closely watched survey that suggests the region has a fighting chance of avoiding a slide back into recession.

Markit’s euro zone purchasing managers’ report for January, published earlier this week, showed that the 17-member bloc was bolstered by German resilience. The euro zone’s largest economy has weathered the inclement climate of the region’s debt crisis much better than most other member states since it emerged in July 2011.

Analysts responded to the news with optimism tempered by a powerful dose of caution. Stella Wang, an economist at Nomura in London, described the survey as “a good start to 2012” but warned that it was “too early to sound the all clear.”

The most encouraging news from the survey was a sharp rise in its headline purchasing managers’ index (PMI) from 48.3 to a five-month high of 50.4. Any figure above 50 suggests an increase in output. The number was boosted by output growth in France and particularly in Germany.

Tuesday’s provisional survey results suggest a possible halt in the euro zone’s return to recession — most commonly defined as two straight quarters of falling output. The Markit surveys point to a decline in activity in the final four months of last year — indicating a relatively short stalling of economic growth when businesses and consumers responded to the euro zone debt crisis by trimming their spending.

However, the PMI covers only the private sector, excluding economic activity in the public sector, which has been hit hard by spending cuts forced on Italy, France and other countries that have had to take emergency action to stop their sovereign bond yields escalating beyond control. It is possible that after allowing for government austerity, the euro zone economy as a whole has continued to decline.

Moreover, the survey showed a fall in employment for the first time since April 2010 — suggesting that companies’ long-term outlook about future demand is sufficiently gloomy for them to reduce headcount.

Chris Williamson, chief economist at Markit, said: “We remain cautious about the improvement. Inflows of new business continued to fall; meaning the marginal increase in output seen in January was the result of firms eating into their backlogs of orders. Furthermore, many firms are having to offer discounts to stimulate sales.”

Analysts counseled against declaring an end to the euro zone downturn until the debt crisis that caused it is resolved.

Investors were reminded of this on Tuesday, as discussions among Greek bondholders over a restructuring of the country’s sovereign debt remained in deadlock.

This raised the prospect of a disorderly default. A worsening of the Greek crisis could once more push up yields in other troubled peripheral euro zone sovereign markets, including Italy and Spain, to levels unsustainable in the long term.

Euro zone banks hold a considerable amount of peripheral government bonds. If they were forced to write down debt, they would have to react by cutting their lending to businesses and consumers — hitting the broader economy.

Stock markets chose on Tuesday to respond more strongly to renewed sovereign debt fears than to the positive PMI survey, with the FTSEurofirst 300 index of euro zone shares down 0.3 percent to 1,045. But although the sovereign bond yields of several euro zone countries ended the day higher, the strong German PMI data helped keep 10-year Bund yields steady at extremely low levels, with the interest rate ending the day unchanged at 1.97 percent.

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