German Services Hit Hard

This news on services appears to confirm the general impression that things are getting worse at a more or less rapid clip in Germany.

The eurozone service sector contracted further in May, with a slight pick-up in France and Italy failing to offset falling activity in Germany, according to a survey released on Wednesday. The Reuters/NTC purchasing managers' index for services showed the sector contracting for the fourth consecutive month, but at a slightly slower pace. The headline index rose from 47.7 in April to 47.9 in May. A score of 50 distinguishes expansion from contraction.

The service sector survey follows gloomy data on manufacturing and falling inflation in the eurozone, and is likely to increase pressure on the European Central Bank to cut rates by half a percentage point on Thursday. The case for a cut was also boosted by fresh data on eurozone retail sales. They fell 1.2 per cent in March compared to the previous month, the sharpest monthly drop in almost a year, Eurostat, the statistics arm of the European Commission, said on Wednesday. That added up to the steepest annual fall in retail sales by 1.6 per cent since 1996. The PMI survey also said business confidence fell back slightly in May, following its rise in the immediate aftermath of the Iraq war, and levels of new business shrank at a faster rate, the fifth consecutive month of contraction.

"Demand for services from both consumers and businesses was reported to have remained weak, while the recent strengthening of the euro served to dampen exports of services," the report said. However, it said the headline numbers masked a "growing disparity" between service sector growth across the eurozone's four big national economies. France, Italy and Spain all recorded modest increases in business activity levels in May. In contrast, Germany experienced a further sharp contraction.

The new business index fell from 46.4 in april to 45.6 in May. New business picked up in Spain, and the rate of contraction eased in France and Italy. But once again Germany was a different story - the rate of decline in new business there increased.Employment dropped sharply in May - with Germany again the worst affected of the four big economies. Input costs rose at the slowest rate since November 2001. "The combination of weak demand, lower fuel prices and cheaper imported goods and services arising from the euro's recent appreciation have helped to significantly reduce growth of service providers' costs in recent months," the report said.
Source: Financial TimesLINK