The pace of growth in the euro zone's services and manufacturing sectors slowed much more than expected this month, but surveys published today showed businesses were more optimistic.
Markit said its flash purchasing managers' index (PMI) data for September pointed to strong economic growth of 0.6 per cent in the third quarter, but down from the 1.0 per cent pace in April-June that surprised markets when reported last month.
The Eurozone Flash Services PMI, compiled from surveys of around 2,000 businesses ranging from banks to restaurants, fell to 53.6 in September from 55.9 in August, its lowest reading since February.
The index has now been above the 50.0 mark that divides growth in business activity from contraction for just over a year. It was well below the consensus forecast for 55.5, supporting German government bond prices.
Economists were debating how worrisome the decline in the figures was for the overall health of the 16-nation region of countries that use the euro. The fall was driven by a slowdown in Germany even as French growth held strong.
"September's plunge in the euro zone PMI provides the strongest signs yet that the euro zone recovery is rapidly losing momentum," said Ben May at Capital Economics, who thought the figures pointed to a slower 0.4 per cent growth pace in the third quarter.
Growth in the manufacturing sector, which drove a large part of the economy's return to growth in the third quarter of last year, eased off to its slowest since January. The manufacturing PMI fell to 53.6 from 55.1, missing forecasts for 54.5.
The composite PMI, made up from the services and manufacturing sectors and often used to predict overall growth, sank to 53.8 this month from 56.2 in August, well short of expectations for 55.7.
Ernst & Young said the slowdown in world trade dragged growth down to its seven-month low.
Chief economic adviser to the Ernst & Young Eurozone forecasts Marie Diron said the export-driven upturn seen in the first part of the year is coming to an abrupt halt.
"The overall weak demand pressures prevented producers from passing the sharp increase in input prices on to consumers. This is particularly evident in the service sector, where output prices continued to fall despite higher input costs. The ensuing compression of profit margins is likely to hamper private sector investment and slow down hiring in the near future."
The manufacturers' new orders index slumped from 55.3 in August to 52.8 in September, its lowest in a year, reflecting a slowdown in global trade in recent months. The service sector's new business index fell by a similar margin.
"New orders have fallen very sharply and in particular when you look at export orders, which are also moving down to the 50 level, the forward-looking elements of the survey are on the weaker side," said Ben Matthews at RBS.
Official data yesterday showed industrial new orders fell more than twice as much as expected month-on-month in July, pulled down by a slump in demand for capital and durable consumer goods.
The euro has also made steady gains against the dollar as fears about a slowdown in United States weigh on the greenback, making the region's exports more expensive.
The service sector's business expectations index - which gives an indication of how firms think the situation will be in a year's time - rose to 68.1 this month from August's 67.1, its highest reading since April. That is in sharp contrast to Germany's ZEW economic think tank's monthly poll which showed economic sentiment fell much more than forecast in September, suggesting the recovery in Europe's largest economy will lose momentum.
Worryingly for policymakers, the composite employment index, which dropped to 51.3 this month from 51.7, suggests that firms took on fewer workers than they did in August.
Unemployment held at 10 per cent of the workforce for the fifth month running in July, near a 12-year high, and undermining household demand.
The euro zone escaped from its deepest recession in post-war history in the third quarter of last year but economists expect economic growth to slow to a crawl over coming quarters as austerity packages begin to bite, though the chances of the region slipping back into recession remain slim.
Median forecasts from the poll of around 70 economists predict the 16-country region will grow by 0.2 to 0.4 per cent each quarter through to the end of next year.
Reuters