Chasm between French, German economies

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London - The schism dividing the euro zone's strong and weak economies deepened to include its core pairing in February as French firms suffered their worst month in four years in stark contrast to prospering Germany.

The gap between the two biggest economies in the euro zone is now at its widest since purchasing manager surveys (PMIs) started in 1998, the latest sounding showed.

It dealt a blow to hopes the euro zone might emerge from recession soon, showing the downturn across the region's businesses worsened unexpectedly this month.

The latest PMIs also suggest that the “positive contagion” across financial markets noted by European Central Bank President Mario Draghi in January may take a long time to filter through to the real economy.

“The improvement in the financial markets will not be enough on its own to kick start an economic recovery,” said Ben May at Capital Economics.

While businesses in Germany sustained a healthy rate of growth, French services companies fell into their worst slump since the nadir of the Great Recession in early 2009.

The PMIs poll thousands of companies each month and are firmly at odds with the upbeat mood on financial markets and improving investor confidence, suggesting the real economy is failing to improve behind a sheen of optimism.

Survey compiler Markit said the French data were more befitting of a struggling peripheral euro zone economy such as Spain or Italy, rather than a key growth engine with Germany.

“There are issues in the French economy which are being unmasked by the depth and severity of this crisis,” said Peter Dixon, global equities economist at Commerzbank.

He said France has major structural problems, and also said business activity may have been crimped by confusion over the government's economic policies.

“That may well have been frightening the horses when it comes to businesses.”

Markit's Eurozone Services PMI fell in February to 47.3 from 48.6, marking a year below the 50 threshold for growth and confounding expectations for a rise to 49.0 from more than 30 analysts polled by Reuters.

None of them forecast such a poor reading.

Markit said the latest PMIs pointed to the euro zone economy shrinking 0.2-0.3 percent in the first quarter, following an estimated 0.4 percent contraction at the end of last year.

That's gloomier than last week's Reuters poll of economists, which suggested the economy will merely stagnate this quarter.

In the Netherlands, consumer confidence fell to its lowest level since records began, unemployment reached its highest in around 16 years, and house prices showed the strongest annual drop since 1995.

CONTAGION, BUT NOT POSITIVE

In contrast to neighbours France and the Netherlands, Germany has enjoyed a good start to the year.

German investor morale soared to its highest level in nearly three years this month, while the statistics office said on Tuesday that employment rose to a high since reunification in the fourth quarter.

“Germany's in a far better place. In terms of its exports, it probably has more exposure to the emerging markets of Asia than many other major European economies, said Commerzbank's Dixon.

“For that reason, I think it's likely to benefit from the pick-up in demand in Asia in particular.”

Still, there are limits to what German prosperity can do for the rest of the region, blighted by harsh budget austerity and rising joblessness.

“Today's figures are a reality check: The improvement in Europe has until now been a financial markets story, while the real economy remains in the doldrums,” said Peter vanden Houte, chief euro zone economist at ING.

“The positive backdrop is that now that the markets will realise that the euro zone recovery remains a long and winding road, some of the upward pressure on the euro exchange rate is likely to disappear.”

The euro sank to a six-week low of $1.32 against the dollar after the data, while European shares fell sharply.

New orders at euro zone service sector firms - which include banks, IT companies, hotels and restaurants - declined at a faster rate this month, with the index sinking sharply to 46.0 from 48.4 in January.

That bodes poorly for next month's services PMI.

Thursday's PMIs also dashed optimism that the slump in euro zone factories would ease further in February, as the manufacturing index barely moved, to 47.8 from 47.9 in January. - Reuters