Eurozone Growth Hit by Services Slowdown

Economic growth in the eurozone has been hit by a further slowdown in its service sector this month, a closely-watched indicator showed on Friday, as Jean-Claude Trichet, European Central Bank president, warned that banks faced a “material test” of their business models.

Growth across the 13-country region decelerated further in November, according to purchasing managers’ indices (PMI), with the service sector leading the decline. However, manufacturing saw a surprise pick-up in growth compared with October. Manufacturing export orders improved despite the euro reaching a record high against the dollar.

The results provided fresh evidence that the eurozone is entering a period of slower growth – but without the US subprime mortgage crisis pushing its economy into dramatic decline.

The composite PMI fell from 54.7 in October to 53.8 in November – the lowest for more than two year, according to NTC Economics and Royal Bank of Scotland, which release the survey.

The results came as Mr Trichet hinted that he expected significant changes in the business model of many banks as a result of the global credit squeeze. Speaking at the European Banking Congress in Frankfurt, he urged a review of the so-called originate-to-distribute” model, which relies heavily on the securitisation of loans – their packaging and reselling.

The period ahead is likely to provide a first material test of changing bank business models,” he said.

Details of previous PMI surveys have shown financial services bearing the brunt of the slowdown in European economic activity in recent months.

Mr Trichet said other lessons to be drawn included the dangers of increasingly complex products, which had created valuation problems, and the need to increase financial market transparency.The role of ratings agencies had to be addressed while banks needed to stress test” against liquidity risks.

So far, the ECB has stuck to a fairly upbeat assessment of likely trends in eurozone growth. But Jacques Cailloux at RBS argued that the latest PMI data showed that the eurozone is moving into a sub-trend growth environment for the first time since the middle of 2005”.

He added: The slowdown in services is particularly relevant because it has been the engine of growth of the euro area in the past two years.”

The ECB has shelved interest rate increases as a result of the global credit squeeze, keeping its main rate at 4 per cent. It has pledged further action if necessary to prevent a pick up in inflation cause by higher energy and food costs becoming lasting.

But many economists believe that the weakening of growth and a stronger euro will keep ECB interest rates on hold well into 2008 and that the next move will be a cut.

The PMI survey also suggested that underlying inflationary pressures remained constrained in the eurozone. It showed some firming in output prices but was still the second weakest reading in the past 12 months.

Eurozone Growth Hit by Services Slowdown

Financial Times
11/23/2007 8:43:31 AM