European Services Continue Improvement
![]( "European Services Continue Improvement")
Following the release of buoyant manufacturing data on Monday in the euro zone and U.K.; services data was released today, showing further improvement in Europe's leading sector.
In the euro zone, PMI manufacturing released this week reached level the highest in 21 months in October, while today PMI services for October's final reading came in at 52.6, higher than both anticipated and preliminary readings of 52.3. The PMI composite was also released today, coming inline with median expectations and the prior reading at 53.0.
It is clear that both sectors are showing expansion, as they are now above the 50 barrier compared with the previous contraction resulting from the global recession, which had damped demand on goods and services. However, since the second quarter economic conditions have started to show improvement due to ongoing help by the ECB and European national governments to salvage their economies and give them a boost.
The upbeat data released this week may provide documentary evidence that the euro zone will emerge from recession in the third quarter, where it will be revealed by GDP for the three months ending in September. Also, it gives signals that the progress will continue in the last quarter of the year.
Today's reading was boosted by Italy, where PMI services for October climbed to 52.2 from 48.5 and in Spain the reading came in at 47.7, higher than the prior 46.4. On the other hand, German services fell to 50.7 from 50.9 and the French services inched down to 57.7 from 57.8.
The European Commission projects that the euro zone this year will contract by 4.0%, while expanding next year by 0.7%, before growing more in 2011 by 1.5%. However, the commission mentioned that there are still major shortcomings weighing on the outlook for the euro zone, such as the widening budget deficit in addition to the escalating unemployment rate.
Tomorrow, the ECB members will meet to set the interest rate and the 60 billion euros stimulus. Expectations are in favor of holding the borrowing cost at its current historical low of 1%, as well as continuing with their quantitative easing methods.
In the U.K., PMI services for October spiked to 56.9, the highest level since August since August 2007, higher than both the prior and expected readings of 55.3 and 55.5 respectively.
Today's reading, along with manufacturing data, is providing hopes that the British economy may grow in the fourth quarter after the disappointing third quarter GDP results, which showed that the economy is still mired in recession with 0.4% contraction.
On Thursday, Mervyn King and his economic team will set the interest rate and announce whether there is expansion in the asset purchase facility program. Analysts are referring that the MPC members will keep the rate at the current 0.5%, while they will expand the program to 200 or 225 billion euros to give a boost to the economy before withdrawing stimulus and starting contractionarty monetary policies in the coming period.
Yet, the economy is suffering from various economic problems due to high unemployment and price deceleration, alongside with the fragile financial sector. Bank of Scotland and Lloyds banking Group mentioned that they will get another bailout from the government. Despite of the improvement witnessed recently, the economy is still being impacted by the global downturn.
The European Commission revised its projections for the U.K. growth this year to 4.6% contraction from 4.3% announced in July, while it predicts the economy to expand in the last quarter of the year to 0.4%, higher than the preceding expectations of 0.2% contraction; whereas the British government estimates growth in the last quarter of the year and a contraction between 3.25% and 3.75% for the current year as a whole.