Businesses stumble at the start of 2016

By Jonathan Cable

LONDON (Reuters) - European businesses had a much poorer start to 2016 than had been expected as deeper price cutting failed to drive a meaningful rise in demand in the euro zone, while many British shoppers stayed home in December, data showed on Friday.

Weakening demand from overseas for the goods produced by Europe's factories suggested the economic tremors from China and elsewhere were spreading, concerns which prompted the European Central Bank only a day ago to line up another round of stimulus.

"The survey suggests that the euro zone economy is still recovering fairly slowly," said Jack Allen at Capital Economics.

"With growth likely to slow as the twin boosts from previous sharp falls in oil prices and depreciation of the euro fade, the economy remains too weak to generate much inflationary pressure. This adds more pressure to the ECB to follow up on its latest hints with action in March."

ECB President Mario Draghi held out the prospect of further loosening - despite the central bank having cut its deposit rate and extended an asset-buying programme only last month - citing heightened uncertainty about emerging economies, financial market volatility and geopolitical risks.

"We are not surrendering in front of these global factors," Draghi told reporters after Thursday's policy decision.

However, stocks and oil, at the forefront of a global market rout since the turn of the year as Chinese authorities struggled to keep their giant economy on track, rebounded strongly on Friday.

Traders pointed to the hints of more monetary policy support by the ECB as well as bargain-hunting from bruised investors as fuel for the rally.

Markit's Composite Flash Purchasing Managers' Index (PMI) (EUPMCF=ECI) for the euro zone, based on surveys of thousands of companies and seen as a good guide to growth, slumped to an 11-month low of 53.5 from December's 54.3.

That was below all forecasts in a Reuters poll which had suggested a modest dip to 54.2. The index has been above the 50 mark that separates growth from contraction since July 2013.

The euro zone data followed sister surveys showing slower growth in Germany, Europe's largest economy, but highlighting a small pick up in French activity, with the services industry returning to growth following the Nov. 13 attacks in Paris.

In Britain, which doesn't use the euro, retail spending suffered its biggest year-on-year fall in over six years during the crucial Christmas selling season.

"This is soft data, and unless January bounces back hard, it provides another excuse for the Bank of England to drag its feet, with no rate hike from them likely until November this year at the earliest," said Rob Carnell at ING.

But there was some cheer for Chancellor of the Exchequer George Osborne in statistics that showed government borrowing dropped sharply.

According to the latest Reuters poll, the Britain's central bank will wait until the third quarter to raise rates from a record low 0.5 percent, later than previously thought. Many economists now say it may wait until as late as November.

INFLATED OPTIMISM?

Survey compiler Markit said if similar readings are maintained, the euro zone PMI points to economic growth across the bloc of 0.3-0.4 percent in the current quarter, roughly in line with the 0.4 percent forecast in a Reuters poll published last week. [ECILT/EU]

Inflation was just 0.2 percent in December, a fraction of the ECB's 2 percent target ceiling, and firms cut prices at the steepest rate since March. The composite output price index sank to 49.1 from 49.5.

Euro area inflation expectations fell over the past quarter and even longer-term projections are on the decline, an ECB survey which the Governing Council relies on heavily showed on Friday.

Even with discounting on goods and services, growth in the bloc's dominant services industries stuttered. A PMI covering the sector fell to a one year low of 53.6, well below the median expectation for no change from December's 54.2.

It was a similar gloomy story for factories - their PMI sank to 52.3 from 53.2, below all forecasts in a Reuters poll and its lowest reading since October. A sub-index measuring output that feeds into the composite PMI tumbled to an 11-month low of 53.2 from 54.5.

New orders from abroad for manufactured goods came in at a slower pace than last month - despite the euro (EUR=) remaining weak this year. The sub-index fell to 52.3 from 53.2.

Despite the slowdown in growth and incoming business, services firms expect things to pick up. Their optimism about the future was at its highest level for nearly five years, with the businesses expectations index leaping to 65.2 from 63.3.

"The euro zone January purchasing managers' surveys are far from disastrous, and they still show reasonable new business growth, rising backlogs of work and decent employment growth," said Howard Archer at IHS Global Insight.