Europe's service and manufacturing industries expanded at the slowest pace in five years in May after oil prices surged, the euro appreciated to a record and banks became more reluctant to lend.
A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.1 from April's 51.9, NTC Economics Ltd, which carries out the survey, reported today. Economists expected a decline to 51.5, according to the median of 16 forecasts in a Bloomberg News survey. A reading above 50 indicates expansion.
Oil reached a record $135.09 a barrel yesterday, raising costs for consumers and companies alike. Europeans are also having to cope with higher credit costs resulting from the U.S. housing slump and the euro's 17 percent appreciation against the dollar in the past year.
"All forward-looking indicators are very weak,'' said Sunil Kapadia, an economist at UBS Ltd. in London. "The economy will continue to deteriorate. Banks will continue to tighten credit. We expect real disposable income to shrink in 2008.''
The European Central Bank has refused to follow the U.S. Federal Reserve and Bank of England in paring interest rates after record food and energy prices drove inflation above 3 percent in the 15-nation euro region. The bank aims to keep inflation just below 2 percent.
"It would take a major sustained drop, or a major rise, in the index to shift the ECB away from its de facto neutral stance,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London.
Stock Markets
The ECB's stance has been partly responsible for benchmark stock indexes in Germany and France underperforming shares in the U.S. and U.K. in the past six months. Banks and consumer-related companies have led the declines.
Germany's DAX Index has lost 7.1 percent since Nov. 23, while France CAC 40 slid 8.9 percent. The U.K.'s FTSE 100 is only down 1.3 percent in the same period, while the Standard & Poor's 500 Index in the U.S. slipped 3.2 percent.
Today's decline was led by services. RBS's gauge of growth in services industries such as banking and telecommunications slumped to 50.6 from 52.0, matching a 4 1/2-year low reached in January. A measure of business expectations fell to 56.1 from 58.7, the lowest since November 2001.
In the U.K., first-quarter growth in services industries was revised down to 0.5 percent from an original estimate of 0.6 percent, the country's statistics office said today.
Banks, Airlines
Credit Agricole, the French bank hardest hit by the subprime crisis, said last week it plans to raise 5.9 billion euros ($9.3 billion) in a rights offer to replenish capital after first- quarter profit fell 66 percent. Deutsche Bank AG, Germany's biggest lender, reported its first quarterly loss in five years last month.
Air France-KLM Group, Europe's largest airline, yesterday posted its first quarterly loss since 2003 and said earnings this year will drop almost 30 percent as fuel prices soar and an economic slowdown dents demand for travel.
"The change in the economic context and a doubling of fuel prices will make the current year challenging,'' Air France Chief Financial Officer Philippe Calavia said.
RBS's index of manufacturing activity declined to 50.5, the lowest since August 2005, from April's 50.7. French consumer spending on manufactured goods unexpectedly fell for a second month in April as shoppers curbed purchases of cars and clothes, a report by France's statistics office showed today.
Credit Squeeze
The U.S. housing slump has driven up the cost of credit globally. The world's biggest financial companies have posted at least $383 billion in writedowns and credit losses since the start of last year after the subprime mortgage market collapsed.
The resulting economic slowdown has prompted the Fed to lower its benchmark rate 3.25 percentage points since September to 2 percent. The Bank of England has lowered rates three times since early December, taking its benchmark to 5 percent.
The rate cuts contributed to the euro's appreciation to records against the dollar and the pound.
Profit at Infineon Technologies AG, Europe's second-largest semiconductor maker, would be cut by 120 million euros if the dollar stayed at current levels against the euro in fiscal 2009, Chief Executive Officer Wolfgang Ziebart said last month.
ECB Bank Lending Survey
The impact of the financial turmoil on credit standards in the first quarter was especially strong for loans financing mergers and acquisitions and corporate restructuring, the ECB said on May 9, citing its quarterly bank lending survey.
The effect was more limited for loans financing fixed investment or inventories and working capital, the bank said.
Business confidence in Germany, Europe's biggest economy, increased as companies stepped up spending on machinery and construction, the Munich-based Ifo Institute said on May 21. The country's economy expanded 1.5 percent in the first quarter, the fastest pace in 12 years.
"I still expect the European economy to grow over the rest of the year, supported by the German economy, which is holding up well,'' said Natascha Gewaltig, a London-based economist at Action Economics.
German companies have improved efficiency and benefited from booming demand for their goods in emerging economies. Private- sector labor costs rose 1 percent last year, the smallest increase in the 27-member European Union. That has helped companies remain competitive even after the euro reached a record $1.60 last month and oil prices doubled in the past year.
Not all euro-region countries are faring as well as Germany. Growth in Spain slowed to 0.3 percent in the first quarter, the worst performance in almost 13 years.
Italy avoided the fourth recession in a decade, even as a slump in consumer spending clouds the outlook for the rest of the year. Europe's fourth-biggest economy expanded 0.4 percent after contracting the same amount in the fourth quarter, Rome-based statistics office Istat said today.
ECB President Jean-Claude Trichet has said economic growth in the second quarter will be less flattering than the 0.7 percent expansion achieved in the first three months.
A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.1 from April's 51.9, NTC Economics Ltd, which carries out the survey, reported today. Economists expected a decline to 51.5, according to the median of 16 forecasts in a Bloomberg News survey. A reading above 50 indicates expansion.
Oil reached a record $135.09 a barrel yesterday, raising costs for consumers and companies alike. Europeans are also having to cope with higher credit costs resulting from the U.S. housing slump and the euro's 17 percent appreciation against the dollar in the past year.
"All forward-looking indicators are very weak,'' said Sunil Kapadia, an economist at UBS Ltd. in London. "The economy will continue to deteriorate. Banks will continue to tighten credit. We expect real disposable income to shrink in 2008.''
The European Central Bank has refused to follow the U.S. Federal Reserve and Bank of England in paring interest rates after record food and energy prices drove inflation above 3 percent in the 15-nation euro region. The bank aims to keep inflation just below 2 percent.
"It would take a major sustained drop, or a major rise, in the index to shift the ECB away from its de facto neutral stance,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London.
Stock Markets
The ECB's stance has been partly responsible for benchmark stock indexes in Germany and France underperforming shares in the U.S. and U.K. in the past six months. Banks and consumer-related companies have led the declines.
Germany's DAX Index has lost 7.1 percent since Nov. 23, while France CAC 40 slid 8.9 percent. The U.K.'s FTSE 100 is only down 1.3 percent in the same period, while the Standard & Poor's 500 Index in the U.S. slipped 3.2 percent.
Today's decline was led by services. RBS's gauge of growth in services industries such as banking and telecommunications slumped to 50.6 from 52.0, matching a 4 1/2-year low reached in January. A measure of business expectations fell to 56.1 from 58.7, the lowest since November 2001.
In the U.K., first-quarter growth in services industries was revised down to 0.5 percent from an original estimate of 0.6 percent, the country's statistics office said today.
Banks, Airlines
Credit Agricole, the French bank hardest hit by the subprime crisis, said last week it plans to raise 5.9 billion euros ($9.3 billion) in a rights offer to replenish capital after first- quarter profit fell 66 percent. Deutsche Bank AG, Germany's biggest lender, reported its first quarterly loss in five years last month.
Air France-KLM Group, Europe's largest airline, yesterday posted its first quarterly loss since 2003 and said earnings this year will drop almost 30 percent as fuel prices soar and an economic slowdown dents demand for travel.
"The change in the economic context and a doubling of fuel prices will make the current year challenging,'' Air France Chief Financial Officer Philippe Calavia said.
RBS's index of manufacturing activity declined to 50.5, the lowest since August 2005, from April's 50.7. French consumer spending on manufactured goods unexpectedly fell for a second month in April as shoppers curbed purchases of cars and clothes, a report by France's statistics office showed today.
Credit Squeeze
The U.S. housing slump has driven up the cost of credit globally. The world's biggest financial companies have posted at least $383 billion in writedowns and credit losses since the start of last year after the subprime mortgage market collapsed.
The resulting economic slowdown has prompted the Fed to lower its benchmark rate 3.25 percentage points since September to 2 percent. The Bank of England has lowered rates three times since early December, taking its benchmark to 5 percent.
The rate cuts contributed to the euro's appreciation to records against the dollar and the pound.
Profit at Infineon Technologies AG, Europe's second-largest semiconductor maker, would be cut by 120 million euros if the dollar stayed at current levels against the euro in fiscal 2009, Chief Executive Officer Wolfgang Ziebart said last month.
ECB Bank Lending Survey
The impact of the financial turmoil on credit standards in the first quarter was especially strong for loans financing mergers and acquisitions and corporate restructuring, the ECB said on May 9, citing its quarterly bank lending survey.
The effect was more limited for loans financing fixed investment or inventories and working capital, the bank said.
Business confidence in Germany, Europe's biggest economy, increased as companies stepped up spending on machinery and construction, the Munich-based Ifo Institute said on May 21. The country's economy expanded 1.5 percent in the first quarter, the fastest pace in 12 years.
"I still expect the European economy to grow over the rest of the year, supported by the German economy, which is holding up well,'' said Natascha Gewaltig, a London-based economist at Action Economics.
German companies have improved efficiency and benefited from booming demand for their goods in emerging economies. Private- sector labor costs rose 1 percent last year, the smallest increase in the 27-member European Union. That has helped companies remain competitive even after the euro reached a record $1.60 last month and oil prices doubled in the past year.
Not all euro-region countries are faring as well as Germany. Growth in Spain slowed to 0.3 percent in the first quarter, the worst performance in almost 13 years.
Italy avoided the fourth recession in a decade, even as a slump in consumer spending clouds the outlook for the rest of the year. Europe's fourth-biggest economy expanded 0.4 percent after contracting the same amount in the fourth quarter, Rome-based statistics office Istat said today.
ECB President Jean-Claude Trichet has said economic growth in the second quarter will be less flattering than the 0.7 percent expansion achieved in the first three months.
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