July 24 (Bloomberg) -- Europe’s economy moved closer to recovery as the manufacturing and service industries contracted at the slowest rate since August and German business confidence climbed to a nine-month high.
A composite index of both industries for the 16 euro nations rose to 46.8 from 44.6 in June, a survey of purchasing managers by Markit Economics showed today. According to a separate report, the Ifo Institute’s index of business sentiment in Germany, the region’s largest economy, increased to 87.3 from 85.9, reaching the highest since October.
The euro rose and stocks extended their gains on the data, which add to signs that the worst is over for the euro-area economy. Demand for factory products drove the gains, underlining the region’s reliance on consumption in other parts of the globe for growth after the economy contracted 2.5 percent in the first quarter as exports slumped.
“Goodbye recession, hello recovery,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “Since demand from abroad is showing signs of life, companies inevitably have to ramp up production.”
The improvement may provide a boost for German Chancellor Angela Merkel, who will seek a second term in office in national elections in September. Her coalition government is spending about 85 billion euros ($121 billion) to stimulate the economy, which it predicts will contract 6 percent this year.
Manufacturing Index
Markit’s manufacturing index rose to 46 this month from 42.6 in June after reaching a low of 33.5 in February, according to today’s report. The services index increased to 45.6 from 44.7 and its low was 39.2, also in February.
Fortis Bank Nederland NV said the data suggested the economy may stabilize in the third quarter.
“We are coming out of recession,” Fortis’s Nick Kounis said. “That doesn’t necessarily mean the recovery is going to be strong, but it is a recovery, and these surveys have further to move up.”
The euro was higher following the data, snapping a three- day decline against the dollar. The European currency was 0.8 percent higher at $1.4252 at 12:20 p.m. in London. The MSCI World Index gained 0.3 percent to 1,027.82, climbing for a 10th straight day in its longest streak of gains since 2003.
The revival is most evident in Germany, where the manufacturing PMI jumped to 45.2 from 40.9. In France, where the slump has been less pronounced until now, the manufacturing PMI gained to 47.9 from 45.9.
‘Stronger Gains’
“Germany has all of a sudden become the leader of the pack, showing stronger signs of stabilization than most other euro-zone countries,” said Carsten Brzeski, senior economist at ING Group in Brussels. “Driven by a pick-up in global activity, it could soon be last in, first out of the recession for the German economy.”
European governments have sought to counter the recession by cutting taxes and boosting spending, while the European Central Bank last month lent banks a record 442 billion euros ($628 billion) for 12 months at its benchmark rate and since then has started buying covered bonds.
Even so, the euro-area economy may shrink about 4.6 percent this year and around 0.3 percent in 2010, the ECB forecasts.
Companies across Europe have cut output and jobs to weather the slump. Siemens AG said this week that it plans to eliminate 1,400 more jobs as Europe’s biggest engineering company strives to meet its 2009 profit targets. Metro AG, Germany’s largest retailer, said last week that it will cut 1,340 jobs at its domestic Cash & Carry unit to improve profitability.
Jobless Rate
The euro region’s jobless rate, already at a decade-high 9.5 percent, may jump to 11.5 percent in 2010, the European Commission forecasts. That may restrain consumer spending as companies, especially in Germany, struggle to get credit.
“The economic and financial environment facing the euro zone continues to be very difficult, even if it has eased appreciably,” said Howard Archer, chief European economist at IHS Global Insight in London. It is “imperative that the ECB remains prepared to take further efforts to boost economic activity if there are any signs of the recent improvement faltering.”
To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Jana Randow in Frankfurt jrandow@bloomberg.net.
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