In These New Times

Eurozone recovery leaves UK behind

Ninemsn
By Ralph Atkins in Frankfurt and Chris Giles in London,

Financial Times, 23 Oct 2009

Prospects for European economic recovery became more confused on Friday after official data showed the UK still mired in its longest recession since the second world war, at the same time as a eurozone survey was much more upbeat about recovery in continental Europe.

Powered largely by France, eurozone private sector activity appeared to expand this month at its fastest rate for almost two years, according to purchasing managers’ indices for the region.

The results boosted hopes that the second half of this year had seen a sustainable rebound, with government and central bank actions helping to avert a slide back into recession.

Morgan Stanley believes the eurozone could have expanded by as much as 0.9 per cent in the third quarter, after a 0.2 per cent contraction in the second quarter – thanks largely to companies destocking less aggressively than before.

Marco Annunziata, chief economist at Unicredit, said: “It’s time to learn to stop worrying and love the recovery, enjoy the strength of the current upswing – and prepare for the less exciting track ahead of us.”

Such a sentiment was absent across the English Channel, where the UK has also enjoyed strength in the equivalent survey in recent months. Widespread hopes of growth in the third quarter were dashed as the Office for National Statistics said the economy contracted by 0.4 per cent in its preliminary estimate.

Weakness in oil and gas extraction, distribution, restaurants and construction prevented the UK economy expanding and left the government with the difficult task of explaining how it has presided over the longest recession since the 1940s with the downturn now on a par with that of the 1980s.

Alistair Darling, UK chancellor, insisted his predictions were still on track: “I have always been clear that growth will return at the end of the year as my Budget forecast assumed.”

But many economists questioned whether the official figures were plausible in light of stronger labour market, survey and production data. Kevin Daly of Goldman Sachs said the initial gross domestic product figures were routinely revised so much the contraction was “unbelievable. Literally.” He added: “Amazingly, if one wants to know in real time what is happening in the UK economy, it has been better to follow the eurozone’s early GDP estimates than the UK’s GDP estimates.”

October’s eurozone purchasing managers’ indices were consistent with quarterly GDP growth of about 0.4 per cent, according to Markit, which publishes the survey.

France appeared to be enjoying a broader recovery. Its composite purchasing managers’ index, covering industry and services, leapt from 54.8 in September to 58.4, the highest for almost three years.

Chris Williamson, chief economist at Markit, said: “In France there is a greater air of confidence among businesses and households that we are very much over the worst.”

For the eurozone, the composite index rose from 51.1 last month to 53.0. With a figure above 50 indicating an expansion in activity, it marked the third consecutive month of growth and the strongest monthly gain since December 2007.

The evidence of a sustained, if gradual, eurozone economic recovery could result in the European Central Bank adopting a less cautious stance.

Striking an upbeat tone, Axel Weber, Germany’s Bundesbank president, and Ewald Nowotny, his Austrian counterpart – who both sit on the ECB’s governing council – this week said a eurozone “double dip” recession was unlikely.