Euro zone economy set to shrink


The euro zone economy looks set to contract in the current quarter, a business sentiment survey has indicated.

Markit's Purchasing Mangers' Index (PMI), published earlier today, suggested the 17-nation region's economy continued to contract in August.

The euro zone economy shrank by 0.2 per cent in the three months to June, according to official data.

The composite PMI, which measures manufacturing and services together, nudged up to 46.6 in August, pipping forecasts for it to hold steady at July's 46.5. But that notched a seventh month below 50, the dividing line between contraction and growth.

More worryingly, the rot in smaller euro zone economies is now taking root in the core, with the flash composite PMI for Germany, falling to a three-year low. This marks a fourth straight month of contraction.

"Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating, and further signs that its export engine has slammed into reverse gear," said Rob Dobson, senior economist at data compiler Markit.

Incoming orders for euro zone companies have now fallen for a full year, with the composite sub-index at 45.0, above July's three-year low of 44.5.

Business activity in France, the second biggest economy that uses the euro as its currency, contracted for the sixth consecutive month, according to its composite PMI.

Economists polled by Reuters last week predicted a similar outcome for the current quarter, with no growth until the start of next year.

Interest rates are already at record lows and the European Central Bank is expected to cut them by 25 basis points to 0.5 percent when it meets next week.

The PMI for the dominant services sector fell to 47.5, missing expectations for a more modest fall to 47.6 from July's 47.9. That came as services firms cut the prices they charge for the ninth straight month.

The output prices index rose slightly to 47.2 from 46.8.

"The global economy is moving to a softer phase and companies are continuing to have to cut prices. The downturn is still led by the manufacturing sector," Mr Dobson said.

The manufacturing PMI spent a 13th month below 50 but rose much more than expected to 45.3 from 44.0.

An output index for the sector, which drove a large part of the bloc's recovery from the last recession, rose to 44.6 from last month's 43.4.

Factories cut jobs a seventh consecutive month, but at a slower page, with the sub-index at 46.2, above July's 44.5.


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