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World growth at risk as service sector slows

By Jonathan Cable and Pedro da Costa

LONDON/WASHINGTON (Reuters) - Growth in much of the world's service sector was anemic in July as firms around the world worried about the debt crisis in Europe and the U.S. as a well as slowing consumer demand, business surveys showed on Wednesday.

World stocks tumbled, with the U.S. S&P 500 stock index falling to a new low for the year as worries grew that fiscal cutbacks and stagnating output would prolong a global economic slowdown and aggravate Europe's debt crisis.

The vast U.S. services sector expanded at its weakest pace since February 2010, with an index from the Institute for Supply Management falling to 52.7 in July from 53.3 in June. Employment conditions also weakened, boding poorly for a closely-watched U.S. jobs report on Friday.

A report on private payrolls from ADP on Wednesday showed 114,000 new jobs were created last month, but economists believe the official government figures due Friday will show a gain of only 85,000 in total payrolls following two dismal months.

"The U.S. economy is stagnating," said Greg Salvaggio, senior vice president at Tempus Consulting. "Clearly the job outlook is deteriorating right now."

Published the day after a deal on a U.S. fiscal package, the surveys followed figures on Monday which painted no brighter a picture for the global manufacturing sector.

In Europe, the dominant services industry was also under pressure last month, growing at the slowest pace in nearly two years.

The 17-nation euro zone's services PMI slid to 51.6 as Germany and France, the continent's two largest economies which had propped up the tepid growth, saw their indexes slip closer to the 50 point mark that divides growth from contraction.

ITALY AND SPAIN SLOW

Italy's contraction deepened while Spain slipped into negative territory and both countries faced pressures in financial markets.

Italian service sector activity contracted in July for the second month running and business expectations were the lowest for over two years, while Spain's index fell to 46.5 from 50.2 in June.

"Italy and Spain softening is to be expected due to nerves but it makes the fiscal challenge facing them look even more difficult, particularly if we see the numbers stay around these levels for several months," said Victoria Cadman, economist at Investec.

Markets are squarely targeting Italy, the euro zone's third-largest economy, concerned by its weak growth and political instability. Prime Minister Silvio Berlusconi is due to speak to parliament to try and calm fears that have led the country to the edge of a Greek-style financial crisis. [ID:nL6E7J30LE]

Italy's economy would be too big for the euro zone's existing rescue funds to bail out and the turbulence has caused alarm across the euro zone and beyond.

Despite the slew of weak data from across the euro zone, the European Central Bank raised interest rates by 25 basis points to 1.5 percent last month, the second such increase this year, but is now seen holding steady until the fourth quarter.

The ECB aims to keep inflation, which was at 2.5 percent last month, just below 2.0 percent. The composite output price index eased to a six-month low of 53.0 from June's 53.9, suggesting firms were holding back on price rises.

"Disappointing economic data on both sides of the Atlantic, as well as surging Italian and Spanish bond yields, has seen risk appetite plummet as pessimism about the global recovery starts to take hold with a vengeance," CMC Markets analyst Michael Hewson said.

Britain surprised markets with its service sector growing at a four month high on strong growth in new business.

CHINA BRAKES

China's fledgling services sector grew in July at its slowest in three months as new orders ebbed, in the latest sign that tight monetary policy is reining in the world's second-biggest economy.

"Service sector activity growth moderated in July, reflecting the effect of monetary tightening and property cooling measures," said Qu Hongbin, an economist at HSBC.

Beijing has raised interest rates five times since October and lifted the deposit reserve requirement ratio nine times but in India, where the central bank has also tightened policy, service sector growth was at a three-month high.

(Editing by Clive McKeef)

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