By Marcus Leach

Business activity in the Eurozone service sector contracted for the fourth straight month in December.

At a three-month high of 48.8, up from 47.5 in November, the final Markit Eurozone Services Business Activity Index was above the earlier flash estimate of 48.3 and signalled an easing in the rate of contraction. However, the average index reading in Q4 2011 was still the lowest since Q2 2009.

The downturn was mainly centred on the region’s periphery, with service sector output falling sharply in Italy and Spain. Spain saw the steeper contraction, but the rate of loss was much slower than in November. Italy, meanwhile, was the only nation to register a faster pace of contraction.

In contrast, Germany saw growth reach a five- month high, while business activity in France rose slightly following a decline in the previous month.

New orders placed at Eurozone service providers declined for the fourth month running, dropping at only a marginally weaker rate than in November.

Furthermore, new orders have fallen at a quicker pace than output throughout this period. Backlogs of work consequently fell for the sixth successive month, and to a greater extent than signalled by the earlier flash estimate (although the decline was the smallest for three months).

Germany was the only nation to report even a slight gain in new business during December. France saw a marginal decrease, whereas Spain reported a further marked decline (albeit less severe than in November). By far the weakest new business trend was seen in Italy, where the rate of contraction accelerated sharply to its fastest for over two-and- a-half years.

The ongoing service sector downturn, weaker global economic growth and ongoing financial market uncertainty meant that business expectations for the coming 12 months remained subdued. Despite edging up to a three-month high, the degree of optimism was still among the weakest seen in the past two-and-a-half years, and lower than seen at any time in the survey history prior to the collapse of Lehman Brothers. Moreover, only France reported an improved degree of business confidence in December.

Job creation remained only very modest across the Eurozone service sector as a whole, and varied considerably by country. Higher employment was reported in Germany and France, both of which saw sharper increases than in November. Conversely, faster rates of job losses were seen in Italy and Spain.

Weak demand and lacklustre domestic and global market conditions restricted firms’ pricing power again in December. Average prices charged for services declined for the third time in the past four months. Reductions were seen in Spain and Italy, while softer increases were reported in Germany and France.

Lower selling prices came at a time when cost pressures continued to build, providing a potential squeeze on margins. Input prices rose at the fastest pace since July. The acceleration was predominantly led by Italy, were input cost inflation surged due to a hike in fuel duty as part of government deficit reduction measures. Rates of increase held broadly steady in Germany and Spain, and eased sharply in France.

“The euro area’s service sector contracted for the fourth month running in December, and the survey reveals widening national variations in performance among the largest member states," Chris Williamson, Chief Economist at Markit said.

“Economic weakness is most evident in Italy and Spain, where domestic demand has been particularly hard hit by deficit-fighting austerity measures and growing uncertainty about the outlook. Recession is already looking inevitable in Italy, and is a growing possibility in Spain as well.

“France is meanwhile showing signs of stabilising from the worrying slide into contraction seen in October, pointing to some resilience in the face of the region’s debt crisis. Germany’s service sector is proving the most resilient, however, with a strengthening of domestic demand — from both consumers and businesses — helping to propel service sector growth to a five-month high.”

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