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Jan 6, 2015 5:15 AM

Eurozone's big economies increasingly drag on the region

The Associated Press

LONDON (AP) Weakness in the eurozone's major economies, such as Germany and France, risks choking off the growth emerging in countries that were at the forefront of the region's debt crisis, a closely monitored survey indicated Tuesday.

In its monthly survey of business activity, financial information company Markit said the eurozone ended 2014 on a tepid note despite "signs of life" in countries like Ireland and Spain, which were hit hard by the financial crisis.

That's another potential headache for policymakers across the region. As well as fears that the eurozone will soon suffer a bout of deflation, or falling prices, which can choke the recovery further, there are renewed concerns over Greece's future in the eurozone. In concert, they've renewed pressure on the euro and exacerbated the fall in oil prices.

Many of the problems confronting the eurozone would be helped by economic growth but survey after survey shows that prospect remains distant.

Markit's so-called purchasing managers' index a gauge of business activity across manufacturing and services reinforced that picture. Its main index rose to 51.4 points in December from 51.1 the previous month. However, that was down from a preliminary estimate for December of 51.7, with figures above 50 indicating expansion.

Overall, Markit suggests that the rate of economic expansion during the fourth quarter was the weakest since the third quarter of 2013.

Markit estimates that the eurozone, which now numbers 19 countries following Lithuania's adoption of the euro at the start of January, grew by a quarterly rate of 0.1 percent in the last three months of the year, continuing the trend of minimal growth since the recession ended in mid-2013.

"The eurozone will look upon 2014 as a year in which recession was avoided by the narrowest of margins, but the weakness of the survey data suggests there's no guarantee that a renewed downturn will not be seen in 2015," Markit's chief economist Chris Williamson said.

Williamson said he was particularly concerned by the downturns in France and Italy, as well as the "stuttering" performance of Germany, Europe's economic powerhouse.

He warned that the recoveries in countries like Ireland and Spain, which are enjoying their best growth spells in years, "are in danger of being extinguished by malaise spreading from the region's largest economies."

The weak data will likely add to calls for more aggressive action from the European Central Bank. Its president, Mario Draghi, recently hinted that the bank stands ready to launch a full-blown bond-buying program similar to those undertaken by other central banks, such as the U.S. Federal Reserve and the Bank of England. Many experts think the ECB could make the announcement at its next monetary policy meeting on Jan. 22.

Although the ECB has cut interest rates to record lows and backed the purchase of some private-sector bonds, it has refrained from a full-scale bond-buying program so-called quantitative easing, or QE. The euro has been in retreat for months on the back of expectations that the ECB will back a further stimulus as traders anticipate more of the currency in circulation. On Monday, the euro fell to a nine-year low against the dollar below $1.19.

While anemic economic growth across the eurozone is a major source of concern for policymakers at the ECB, it is too-low inflation that's prompting the speculation of further action.

Inflation, at last count, stood at 0.3 percent, far below the ECB's target of annual price increases just below 2 percent. Figures Wednesday are expected to show a further decline, with some economists predicting an actual decline due to sliding oil prices. The benchmark New York rate has fallen below $50 for the first time in nearly six years.

Although falling prices may sound good, so-called deflation can choke the life out of an economy if consumers put off purchases in the hope of future bargains, and companies struggle to remain profitable. Deflation can prove difficult to reverse, as evidenced by Japan's economic stagnation over the past two decades.


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