Euro zone services sector contracts


The euro zone is likely to have slipped back into recession in the current quarter, according to a survey published today that showed a seventh month of contraction for the region's private sector as new orders dwindled.

The Purchasing Managers' Index (PMI), published by Markit, showed the economic rot that began in smaller periphery members of the 17-nation region is now taking hold even in Germany, the region's largest and strongest economy.

August's composite PMI, which measures manufacturing and services together, fell to 46.3, revised down from a flash reading of 46.6 and below July's 46.5.

"The final August PMI came in only slightly below its earlier flash estimate, leaving the euro zone economy on course to fall back into technical recession in the third quarter," said Rob Dobson, senior economist at data compiler Markit.

"The looming concern is the increasing signs of weakness coming out of Germany, the nation others were looking to as a pillar to prop up growth in the broader currency region."

Germany's composite PMI fell to 47, chalking up its lowest reading since June 2009 when the euro zone was in the middle of the worst recession since World War Two.

A Reuters poll published last month predicted the region would contract 0.2 per cent in the three months to September but Mr Dobson said the PMIs suggested the downturn could be far worse and that the economy would contract 0.5 to 0.6 per cent.

The euro zone economy shrank 0.2 per cent in the three months to June, according to official data. A second quarter of contraction would meet the technical definition of recession.

A sovereign debt crisis which began in the euro zone's smaller economies is now hammering business and consumer confidence across the region, putting pressure on policymakers to take radical steps to help vulnerable countries such as Spain and Italy.

European Central Bank president Mario Draghi is expected to flesh out his plans tomorrow for a bond-buying programme he announced in August, although few economists polled by Reuters expect he will reveal its innermost workings.

Economists in the Reuters poll were divided, though, over whether the bank will cut its main refinancing rate from 0.75 per cent to a new record low of 0.5 per cent this week. An October rate cut instead looked equally likely.

Heaping further pressure on policymakers and likely adding to expectations for a cut, the PMI for the region's dominant services sector fell to 47.2 from July's 47.9, below a flash 47.5. It has only been above 50 once in the past year.

New business has declined for a year, despite firms cutting prices for the ninth straight month, with the sub index coming in at 44.7, just above 44.5 in July but revised down from a flash 45.

As the downturn intensifies, firms reduced their workforce again in August, with the composite employment index registering 47.5, above July's reading of 47.2. The index has been below 50 since the turn of the year.

"Sharp declines in new orders at manufacturers and service providers, plus further job losses, mean that there is little prospect of a sustained improvement in economic conditions over the near-term," Mr Dobson said