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Euro zone business activity gloomy in November, scant hope for improvement

By Jonathan Cable
Euro bank notes are exhibited at Austrian central bank's Money Museum in Vienna

By Jonathan Cable

LONDON (Reuters) - Euro zone business growth has almost ground to a halt this month as a downturn in the manufacturing industry appears to be increasingly affecting the bloc's dominant services industry, a survey showed on Friday.

Worryingly for policymakers at the European Central Bank, who have so far failed to stoke demand and inflation, forward-looking indicators suggest the bloc's economy is on shaky ground.

New ECB President Christine Lagarde reaffirmed on Friday that the central bank would do its part by continuing to support the economy and respond to future risks while monitoring the side effects of its easy money policy.

The ECB has resumed its bond-buying programme and is purchasing 20 billion euros' worth a month, and in September it lowered its deposit rate deeper into negative territory while keeping the door open to future reductions.

But so far those measures have not borne fruit.

IHS Markit's flash November composite Purchasing Managers' Index, seen as a reliable guide to economic health, slipped to 50.3 from October's 50.6, moving to within a whisker of the 50 mark separating growth from contraction.

That was below all expectations in a Reuters poll and was only just shy of a more than six-year low reading in September.

November's PMI points to GDP growth of 0.1% this quarter, IHS Markit said, slower than the 0.2% last quarter and the 0.2% prediction in a Reuters poll last week.

"It seems that growth is slowing to a snail's pace in the fourth quarter. The winter months will, therefore, be a nail biter for euro zone growth," said Bert Colijn at ING.

Still, strong exports and state and consumer spending helped the German economy avoid a recession in the third quarter, other data showed, although Europe's biggest economy is going through a soft patch.

Business conditions there continued to deteriorate in November, although more slowly than recently, but its PMI showed the mood was still gloomy.

"There are signs that Germany's industrial recession may have passed the worst. But this merely suggests that the pace of contraction is slowing," said Andrew Kenningham at Capital Economics.

In France, business activity picked up slightly this month, as the euro zone's second-biggest economy battles to keep growing while international trade disputes cloud the outlook.

Core European government bond yields edged lower after the PMI data but global stocks inched up, lifted by China's renewed offer to work out a trade pact with Washington.


DOWNBEAT

Giving little hope for a big revival, new business fell for a third month in the currency union. The sub-index was 49.7, albeit just above October's 49.6.

A PMI for the bloc's dominant service industry dropped to a 10-month low of 51.5 from 52.2. That was also below all expectations in a Reuters poll.

Manufacturers produced slightly more positive news, but their PMI showed activity contracted for a 10th month. The factory PMI rose to 46.6 from 45.9, above the median forecast for 46.4.

An index measuring output, which feeds into the composite PMI, rose to 47.1 from 46.6. That contraction was despite factories cutting the prices of their goods for a fifth month.

Once more, with demand falling a chunk of that production was derived from completing backlogs of work and factories again reduced headcount and cut back on purchases of raw materials.

Also probably of concern for policymakers, services firms likewise filled old orders faster than new ones came in and curtailed hiring, suggesting there won't be a turnaround anytime soon.

That meant optimism dwindled to its lowest since mid-2013. The services business expectations index dropped to 57.0 from 57.4.


(Reporting by Jonathan Cable; Editing by Hugh Lawson)