An array of upbeat eurozone data on Friday bolstered hopes of a durable recovery there but experts remained cautious and Britain shocked financial markets by failing to creep out of recession in the third quarter. The UK economy shrank by 0.4 percent compared with the previous three months, crushing expectations of an end to the downturn and instead making its recession the longest on record.
The pound dropped more than a cent against the dollar in response. "Third quarter GDP is awful, with no positive news within the report," said James Knightley, economist at ING. "More worryingly from sterling's perspective is the fact that the UK may be the only major economy to have contracted in the third quarter." In sharp contrast, Germany and France started growing again in the second three months of the year. Continental Europe again fared much better on Friday.
-- Britain fails to climb out of recession
-- German business sentiment rises slightly
-- French consumer spending jumps
Eurozone services business grew at its fastest pace in 20 months in October while manufacturing activity expanded for the first time in over a year. Markit's Eurozone Flash Services Purchasing Managers Index, compiled from surveys of around 2,000 companies, leapt to 52.3 in October from 50.9 in September, its highest since February 2008 and dwarfing consensus expectations.
"It is an indication that the recovery is gaining breadth and in doing so will become more self-sustaining," said Chris Williamson at data provider Markit. Eurozone Q3 GDP data are due out next month. The currency bloc marginally failed to exit recession in the second quarter.
Other statistics showed industrial new orders in the eurozone rose more than expected in August, underlining expectations of a recovery in the third quarter and beyond. And German business sentiment rose slightly in October to its highest level in over a year, pointing to a steady if hesitant recovery in Europe's largest economy.
The Munich-based Ifo economic research institute said its business climate index, based on a monthly survey of some 7,000 firms, rose to 91.9 from 91.3 in September, hitting its highest level since September 2008. Separate PMIs showed activity continuing to expand in both Germany and France and the latter also reported a 2.3 percent month-on-month jump in consumer spending in September.
But even if anaemic economic growth is back, companies are still slashing jobs in a bid to cut costs. Markit's composite employment index for the eurozone remained firmly in contractionary territory. "This is the one to watch," said Williamson. "We need a stabilisation of the labour market to help sustain any recovery next year."
Policymakers and analysts expressed caution, given that major economies remain propped up by record-low interest rates and massive stimulus spending which must be withdrawn at some point. "The German economy is not quite standing on its own feet again, but at least it has some support," Ifo economist Klaus Abberger told Reuters.
The Bank of England, for example, is most of the way through a 175 billion pounds programme of asset buying to pump money into the economy and must decide soon whether to extend it yet further. Friday's shock GDP number may force its hand but its policymakers are looking to the scheme's eventual unwinding.
"In the medium term, meaning more than six months out, there's no question that we're going to have to reverse the extreme policy measures that we took," BoE Monetary Policy Committee member Adam Posen told BBC Radio Scotland. Corporate results also suggest global recovery will be fragile well into next year, with consumers reluctant to spend and businesses fearful to invest.
World number two truckmaker Volvo reported a smaller third-quarter loss than expected on Friday but said it still expected sharp declines in its main markets. Jeremy Darroch, chief executive of Britain's dominant pay-TV firm BSkyB, said he had still not seen any improvement in the consumer environment, despite his group signing up a better-than-expected 94,000 customers in the first quarter.