Downturn spreads to euro zone services

The euro zone's private sector contracted for the first time in two years last month, shrinking faster than first reported as new business dried up while the debt crisis cut expectations for the future to two-year lows, surveys showed today.

A downturn that began in smaller members of the 17-nation region has gone mainstream. Survey compiler Markit said the latest figures suggest the economy will contract in the fourth quarter unless business and consumer confidence rallies.

"The malaise is spreading to the core, where surging rates of expansion earlier in the year have turned rapidly into contraction in Germany and only very modest growth in France," said Chris Williamson, chief economist at Markit.

Markit's Eurozone Services Purchasing Managers' Index (PMI) fell to 48.8 last month from 51.5 in August, its lowest reading since July 2009 and below an earlier flash reading of 49.1.

It is the first month the index has been below the 50 mark that divides growth from contraction since August 2009.

The composite PMI, which combines the services and manufacturing data published earlier this week and is seen as a guide to growth, fell to 49.1 from 50.7 in August, its lowest level since July 2009 and down from a flash estimate of 49.2.

Economists polled by Reuters last month predicted third and fourth quarter growth of 0.2 per cent, but Mr Williamson said the result could be even weaker.

"A mild output contraction in September sits in stark contrast to the buoyant pace of expansion seen at the start of the year, suggesting that the economy will have stagnated in the third quarter as a whole," Mr Williamson said.

"Even more disappointing is the steep drop in new business, which suggests that GDP will contract in the fourth quarter unless business and consumer confidence rally in coming weeks."

The composite new business index fell to a more than two-year low of 46.5 last month, a steep drop from August's 49.8 and well below a flash estimate of 47.2.

Optimism dimmed substantially among the 4,000 services firms surveyed, which range from financial services to restaurants. The business expectations index sank three points to 54.6 from August's 57.6, the lowest reading since April 2009.

Earlier data from Germany, Europe's largest economy and the backbone of the region's now-stalled recovery, showed activity close to stagnation, while in France the rate of growth slowed to a 26-month low.

Italy's service sector contracted for the fourth month and at a faster pace than expected while Spain's shrank for the third straight month.

But the tough conditions meant companies cut prices charged for the first time in over a year which may moderate some fears at the European Central Bank about above-target inflation.

The ECB has raised its key lending rate twice since April, taking the refi rate to 1.5 per cent, in an effort to control inflation that according to flash data was at 3.0 per cent in September - above the central bank's 2 per cent target ceiling.

Mounting evidence of a weakening euro area economy prompted some economists to predict an interest rate cut tomorrow from the ECB, although most expect it to wait until the new year before easing policy.

Reuters