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German business contraction adds to eurozone worries

German business contraction adds to eurozone worries
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Concerns continue over eurozone economic contraction with a sharp drop in German business activity in April; the first time that has happened in five months.

The initial reading of surveys of company purchasing managers (PMI) showed a slight improvement for the whole region, though still no expansion, which may influence the European Central Bank’s interest rate decision this week..

There was a surprise decline in German companies – particularly the service sector – and survey compiler Markit said “that will no doubt act as a drag on growth”.

“Previously, we’ve seen Germany expand while other countries have contracted – notably Spain, Italy and France,” explained Chris Williamson, chief economist at Markit.

By contrast, the French business activity reading was much less bleak, suggesting it might be over the worst of its economic troubles.

In March French companies had endured their worst month since the depths of the deep recession in 2009.

Regionwide factories suffered another gruelling month in April, with the manufacturing PMI falling to its worst this year.

There seems little prospect of much improvement next month, with the new orders index dropping to its lowest since December

Interest rate cut?

Markit’s Williamson said officials at the European Central Bank, which meets next week to decide monetary policy, may be relieved to see the eurozone PMIs at least did not signal a further deterioration this month.

However, that could change.

“The forward-looking indicators suggest there’s risks to the downside for the contraction to gather pace,” said Williamson.

The euro area’s economy shrank 0.6 percent quarter on quarter in the last three months of 2012.

Comments by European Central Bank policymakers on Monday stressing falling inflation and poor growth prospects in the eurozone suggest the ECB may be leaning towards a further cut in its main interest rate.