Ukraine crisis dents European business activity

September 3, 2014 - 11:04 AM
Ukraine

Ukrainian President Petro Poroshenko, left, welcomes Secretary-General of the Council of Europe Thorbjorn Jagland during a meeting in Kiev, Ukraine, Monday, Sept. 2, 2014. (AP Photo/Mykhailo Markiv, Presidential Press Service, pool)

LONDON (AP) — On the day that the outlook for the European economy may have become a bit brighter amid hopes of a cease-fire in eastern Ukraine, a closely watched survey Wednesday showed the extent to which the crisis in the country has weighed on business confidence across the continent.

In its monthly survey, financial information company Markit highlighted tensions in Ukraine for a sharp fall in its gauge of business activity for the 18-country eurozone.

Its purchasing managers' index, which collates figures from the manufacturing and services sectors, fell to 52.5 points in August from July's 3-month high of 53.8. Though it remains above the 50 threshold that signals growth, the indicator is at its lowest level this year and below the preliminary estimate of 52.8.

"Tensions in Ukraine are clearly having an impact on confidence, subduing business spending and investment," said Chris Williamson, Markit's chief economist.

Separately Wednesday, the European Union's statistics office, Eurostat, said eurozone retail sales fell by a monthly 0.4 percent in July.

The figures echo a raft of recent findings that any momentum that the eurozone economy may have been showing earlier in the year came to a halt this summer. In the second quarter, the economy posted flat growth, raising fears of an unprecedented triple-dip recession.

The hope in Europe is now that the geopolitical tensions that have been hobbling Europe's economy will ebb following a day of fast-paced developments.

First, Ukraine President Petro Poroshenko announced that a cease-fire for eastern Ukraine had been agreed on with Russian President Vladimir Putin. Putin then issued his own peace plan, calling on the Russian-backed insurgents there to "stop advancing" and urging Ukraine to withdraw its troops from the region.

Though details were sketchy and there was no immediate indication that the fighting would stop, investors around Europe responded positively to the news. The Stoxx 50 index of leading European shares was up 0.9 percent, while Germany's DAX spiked 1.3 percent. Unsurprisingly, Russia's RTS index was the standout performer, trading 5.6 percent higher.

"Reports of a cease-fire in eastern Ukraine have been welcomed with open arms by the markets following months of growing tensions between Russia and the West that has resulted in painful economic sanctions being applied by both sides," said Craig Erlam, market analyst at Alpari.

Germany's economy, Europe's biggest, has been one of the most affected by the tensions over Ukraine. Germany has a big trading relationship with Russia that has been threatened by the tit-for-tat sanctions between Moscow and the European Union.

It's unclear whether the cease-fire agreement will have any bearing on Thursday's monthly meeting of the European Central Bank. There are some expectations in the markets that the ECB, headed by President Mario Draghi, may back further measures to stimulate the ailing eurozone economy. There's even been talk that it could back a Federal Reserve-style program to inject new money into the economy.

Markit's Williamson said it's "likely to be too early" to see anything other than stronger rhetoric from the ECB as far as a stimulus is concerned, especially as the firm's survey is pointing to strong growth in Ireland and Spain, two of the countries at the forefront of the region's debt crisis.

He said the impressive performances of the two will likely encourage Draghi to "stress that recoveries in other countries are being held back by the lack of successful structural reforms rather than a lack of central bank stimulus."