Euro-zone recession deepens after sharp fall in activity

THE EURO zone has lurched even deeper into recession after an unexpectedly sharp plunge in economic activity this month, a closely-watched survey has shown.

A surprising large fall in eurozone purchasing managers’ indices has dashed hopes that the economic situation might have stabilised – and suggests growth figures for the first quarter of 2009 will be worse than the end of last year. France’s economy, which had previously held up relative to Germany, appeared particularly badly hit.

The “composite” euro zone index, covering service and manufacturing sectors, fell from 38.3 in January to 36.2 in February, more than wiping out a small rise in last month’s survey and marking a fresh record low for the survey, which started in 1998. Signs that the rate at which the economy was contracting had peaked have been “decisively wiped away”, said Chris Williamson, chief economist at Markit, which produces the survey. “There appears to be no sign of a bottoming out.”

These indices are regarded as reliable, forward-looking indicators of activity. The euro-zone economy has been shrinking since the middle of 2008, but official figures last week showed the pace of contraction accelerated dramatically in the final quarter, when gross domestic product fell by 1.5 per cent. That put Europe on course for the worst recession since the second World War.

The latest survey results strengthen the case for further cuts in European Central Bank (ECB) interest rates. Jean-Claude Trichet, ECB president, has signalled that a cut is likely at its meeting in early March. Markets expect a half percentage point cut to 1.5 per cent, but the deteriorating outlook may result in more cuts in coming months, especially with inflation pressure tumbling.

Among the euro zone’s largest economies, Germany has been badly hit by collapsing demand for exports. The German purchasing managers’ survey noted “particular weakness in demand from the US and Asia”. But the country’s exporters are also highly exposed to eastern Europe – where economic difficulties have intensified in recent days – suggesting that the worst may yet be to come.

France, by contrast, has benefited from relatively robust domestic demand. But the French composite purchasing managers' index tumbled from 40.4 in January to 37.3 this month, also a record low for the survey. – ( Financial Timesservice)