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Prospects Daily: Euro weakens to near 22-month low after EU summit, while Euro Area business activity slumps for fourth consecutive month

Global Macroeconomics Team's picture

Important developments today:

1. Euro weakens to near 22-month low after EU summit

2. Euro Area business activity slumps for fourth consecutive month


Euro weakens to near 22-month low after EU summit. The 17-nation currency dipped to its weakest level since July 2010 against the dollar as European leaders at a summit showed an apparent lack of consensus on how to deal with the region’s widening crisis. European leaders failed to agree on jointly issuing euro-zone bonds to reduce borrowing costs for highly-indebted countries and provided no immediate help for recession-hit Spain. Weak German economic data, such as sliding German business confidence and shrinking manufacturing, also prompted investors to sell the common currency. The euro fell as much as 0.5% to $1.2516, the lowest level since July 6, 2010, before moving 0.1% higher to $1.2564 in morning trade in New York. The shared currency slipped 0.2% to 99.80 yen, after falling 1.4% yesterday.

Euro Area business activity slumps for fourth consecutive month. According to Markit’s survey of purchasing managers, business activity in the Eurozone has fallen to a near three-year. The Composite (manufacturing and services) Output Index fell for the fourth consecutive month to 45.9 in May from 46.7 in April as depressed domestic demand and tight credit conditions holds back production (the 50-mark separates contracting activity from expanding activity). Even core Euro Area economies are being impacted. For instance, the latest IFO business climate index shows business confidence in Germany falling sharply in May, suggesting that the crisis in periphery Euro Area economies is having a dampening effect on their economic activity. According to Markit’s survey while activity in Germany declined marginally in May, the rate of decline of business activity in France was the sharpest observed since April 2009 – a rate of decline similar to that of the rest of the Euro Area economy. Though the Euro Area escaped a recession in Q1, at the current pace of declining activity, GDP is most likely to contract in Q2.

Among Emerging Markets

In East Asia and Pacific, the unofficial HSBC-Markit “flash” manufacturing Purchasing Managers’ Index (PMI) for China fell for the seventh month in a row to 48.7 in May from 49.8 in April (An index level below 50 indicates contraction). The continued decline, including for the sub-indices for new orders, export orders and employment, underscores the weakness of the economy and relatively muted activity especially for the smaller firms that are covered in the index, and raises the prospect of growth slowing further from the 8.1% year-on-year (y/y) recorded in the first quarter of 2012. China’s official PMI, with a different sample and methodology, however has showed continued expansion for over a year until April.  

In South Asia, Bangladesh’s GDP growth slowed to 6.3% (y/y) in the 2011-12 fiscal year ending in June from 6.7% in the previous fiscal year, according to preliminary estimates by the Bangladesh Bureau of Statistics. The slowdown was in part due to a deceleration of agricultural growth to below 2% from the previous year’s 5.1%, but manufacturing growth rose slightly to nearly 10%. The estimates take into account activity in the first three quarters of the fiscal year and are


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