European recovery gathering momentum

AP News
Posted: Oct 03, 2013 3:31 PM

LONDON (AP) — While the U.S. economic outlook has become murkier because of the partial shutdown of the government, the picture in Europe — so long the laggard of the global economy — has brightened.

Another round of economic data Thursday provided evidence that Europe's recovery from recession is becoming broad-based and self-sustaining.

Particularly encouraging was the news that retail sales across the eurozone rose a forecast-busting 0.7 percent in August from the previous month, according to Eurostat, the EU's statistics office. Retail sales are an important barometer of economic confidence as they show consumers are more willing to spend rather than save despite many headwinds, such as high unemployment and government-imposed austerity measures. They are also a major component of growth.

The August increase added to the previous month's 0.5 percent rise — itself revised higher — and was above market expectations for a more modest 0.2 percent gain.

Much of the improvement was due to massive increases recorded in Portugal and Spain, two of the countries at the forefront of Europe's debt crisis. How much of their respective 4.8 percent and 3.8 percent increases were due to tourists spending more on holiday wasn't immediately clear.

Earlier Thursday, a closely-watched survey found economic output across the eurozone rose in September at its fastest pace since the summer of 2011. Financial information company Markit said its composite purchasing managers' index — a broad gauge of business activity across the manufacturing and services sectors — rose to a 27-month high of 52.2 points in September. The increase from 51.5 in August takes the index further above the 50-point threshold that indicates expansion.

The figures echo recent findings about the eurozone — that a recovery is taking place after the currency bloc emerged in the second quarter from the longest recession in its near 15-year history. This week, figures showed the number of unemployed fell in August for the third consecutive month, the first time that has happened since April 2011.

In the United States, meanwhile, the economy has shown signs of weakening. Growth at U.S. service firms slowed in September as sales fell sharply, new orders dropped and hiring flagged, according to a private survey released Thursday.

The decline suggested that U.S. consumers and businesses pulled back on spending last month. The report came on the third day of a partial government shutdown that threatens to lower growth in the October-December quarter.

The shutdown could shave about 0.15 percentage points from fourth-quarter growth for each week it lasts, economists estimate.

Also Thursday, the number of people seeking U.S. unemployment benefits rose slightly but remained near six-year lows. The weekly applications are a proxy for layoffs and suggest companies are cutting fewer jobs.

That is typically followed by more hiring, but that hasn't happened yet. A survey by payroll provider ADP showed that job gains in September remained at roughly the same modest level they have been at all year.

An even greater disruption could occur in two weeks if Congress hasn't agreed by then to raise the U.S. government's borrowing cap. That cap limits total U.S. government debt to $16.7 trillion.

If it isn't raised, the government would be unable to borrow to fund programs or make interest payments. Spending would be slashed by as much as one-third and the U.S. government could even default on its debts.

Christine Lagarde, managing director of the International Monetary Fund, warned Thursday that a failure to raise the limit would severely damage the U.S. and global economies.

Meanwhile, the signs of economic improvement in Europe help explain why the European Central Bank opted against doing anything more to shore up the recovery at Wednesday's policy meeting and is a hopeful sign

Analysts, though, were keen to point out that the economy might struggle to build on the recent months' improvements.

"Spending will continue to be soft in the coming months, as euroland households face a number of hurdles that will keep discretionary spending subdued," said Anna Zabrodzka, economist at Moody's Analytics.

Governments are still cutting spending and benefits. And despite the stabilization in the labor market, the unemployment rate remains near a record high at 12 percent.

"The region is by no means out of the woods yet," said Chris Williamson, chief economist at Markit, though he said Thursday's figures boded well for economic growth in the third quarter.

Over the past three years, the eurozone, which has a population of around 330 million, has grappled with a debt crisis that threatened the future of the euro currency itself.

Countries across the region, but mainly in the south, such as Greece, Portugal and Spain, have had to take tough austerity measures to convince bond market investors that they could get a handle on their public finances. A combination of recession, poor management and expensive bank bailouts had caused public debt to swell.

The problems afflicting the eurozone have put a brake on the global economic recovery. Though the U.S. unemployment rate has fallen steadily over the past three years to 7.3 percent, many economists think the decline would have been steeper if companies didn't have to worry about problems in Europe, a key export market.

The U.S. economy is facing its own headwinds — the government shutdown, which is in its third day, appears to have weighed on confidence in September. A survey of the services sector dropped sharply for the month, to 54.4 points from the previous month's 58.6, which was the highest since December 2005.

It's not just the countries that use the euro that are in better shape than a year ago.

Britain's equivalent survey of the services, manufacturing and construction sectors — published by the Chartered Institute of Purchasing and Supply — came in at 60.4 points in September. Though modestly down on the previous month's 60.6, it still shows the economy in full swing — the average over the quarter was the highest since comparable data were first compiled in 1998.

"While the U.S. slumbers under a self-imposed government shutdown, the U.K. economy continues to show signs that it is waking up faster than anyone predicted," said Dennis de Jon, general manager of UFXMarkets.


AP Economics Writer Christopher S. Rugaber contributed to this report from Washington.