[NYTr] Booming Economy: Eurozone suffers worst jolt since 9/11

[All the News That Doesn't Fit]

Financial Times - Sep 21, 2007
http://www.ft.com/cms/s/0/d42aed9c-6826-11dc-b475-0000779fd2ac.html

Eurozone suffers ‘worst’ jolt since 9/11

By Ralph Atkins in Frankfurt

The eurozone economy has this month suffered its biggest jolt since the
aftermath of the September 2001 terrorist attacks, with global
financial turmoil hitting the services sector particularly hard,
according to a closely watched survey.

The unexpectedly steep fall on Friday in the eurozone purchasing
managers’ index – the third consecutive monthly drop – could knock
policymakers’ previous confidence that the 13-country eurozone economy
would escape largely unscathed from the US subprime mortgage crisis.

Although the slowdown may prove temporary – and the survey showed
companies continuing to take on staff at a rapid rate – it coincides
with the euro’s rise to record levels against the dollar and on a
trade-weighted basis, which will hit eurozone exports.

The European Central Bank will see the survey data adding to
uncertainty over the outlook and reinforcing its recently adopted “wait
and see” stance towards interest rate increases.

But financial markets have started speculating that the next ECB
interest rate move will be downwards.

Friday’s data showed the fastest deceleration in eurozone service
industry growth in the survey’s nine-year history, almost certainly
reflecting problems faced by the finance sector. In manufacturing, the
slowdown was less steep but still bore the effects of higher eurozone
interest rates over the past two years as well as the stronger currency.

The global credit squeeze “was not just a shock to confidence but is
having serious repercussions on the real economy”, said Jacques
Cailloux, economist at the Royal Bank of Scotland, which releases the
survey in conjunction with NTC economics.

The composite purchasing managers’ index – intended as a guide to
activity in both the manufacturing and services sector – dropped from
57.4 in August to 54.5 in September. That was the biggest drop since
October 2001 and indicated the slowest growth for two years.

Earlier this month, the European Central Bank shelved a planned rise in
eurozone borrowing costs pending more information on the macroeconomic
impact of financial market turmoil. It believes firmly that changes in
its main interest rate should remain consistent with its primary
responsibility for combating inflation – rather than bailing out the
financial sector.

So far, the euro’s appreciation appears not to have undermined
significantly its underlying optimism about eurozone growth prospects.
Lorenzo Bini Smaghi, ECB executive board member, emphasised in a speech
in Paris on Friday that the central bank watched effective exchange
rates, which take into account the relative importance of countries in
trade and have moved less dramatically than the dollar-euro rate.

Ken Wattret, economist at BNP Paribas, said that the composite
purchasing managers’ index “has shifted from a level consistent with
policy tightening to a level not far above that consistent with rate
reductions in the past . . .we should be focusing on whether the next
move in ECB interest rates is down, not up”.

Copyright The Financial Times Limited 2007