Financial thoughts

Europe's manufacturing and service industries contracted at a record pace in October as the financial crisis damped exports and consumer spending.

Royal Bank of Scotland Group Plc's composite index dropped to 44.6, the lowest since the survey began in 1998, from 46.9 in September, Reuters reported. Economists forecast a decline to 45.4, according to the median of 17 estimates in a Bloomberg survey. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.

Europe's economy may be tipped into a recession as the global credit crunch forces governments to bail out banks and stock markets plunge. Daimler AG, the world's second-biggest maker of luxury cars, yesterday slashed its 2008 earnings forecast by 1 billion euros ($1.3 billion) and Fiat SpA, Italy's biggest carmaker, said it will cut production in the fourth quarter.

“We're going to see a contraction of the European economy in the fourth quarter,'' said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. The European Central Bank “is going to cut interest rates as early as the next governing council meeting'' on Nov. 6, he said.

The euro dropped more than a cent after the PMI figures were published to $1.2530, a two-year low. European stocks fell, extending the Dow Jones Stoxx 600's decline to 46 percent this year.

Rate Cuts Expected

The International Monetary Fund on Oct. 7 predicted growth in the 15 countries sharing the euro would slow to 0.2 percent next year, the weakest since the single currency began trading in 1999, from 1.3 percent this year.

The ECB joined a globally coordinated rate cut this month in an effort to boost confidence, reducing its benchmark by half a point to 3 free credit report and score.75 percent. Investors expect the Frankfurt-based bank to lower the rate by a further half-point to 3.25 percent next month, Eonia forward contracts show.

“The euro zone is experiencing a double-whammy,'' said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “The escalation of the financial crisis in the past few weeks has damped demand in the euro zone as well as from its trading partners.''

Markit's manufacturing index dropped to 41.3 this month from 45 in September, while the services index fell to 46.9 from 48.4. At the same time, inflation pressures continued to ease from a July peak, today's report showed.

Risks Materialize

“There has been a materialization of the downside risks to growth and we have to take that into consideration in all respects, and particularly as regards the influence that it has on the upside risks for price stability,'' ECB President Jean-Claude Trichet said in New York on Oct. 14. In an interview on French radio on Oct. 19, he described the 15-nation euro area as being in a “very, very important growth slowdown.''

The euro's decline and lower oil prices may help to steady the economy by making exports more competitive and reducing household energy bills.

“Commodity and oil prices and the euro's rate against the dollar will help confidence to recover,'' said Kenneth Broux, and economist at Lloyds TSB in London. Oil prices have halved in the past three months, helping euro-area inflation slow to 3.6 percent in September.

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