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Plunging activity fuels euro recession fears

London, October 5, 2011

Private sector business activity shrank in the euro zone for the first time in two years last month as new orders dried up, stoking fears that the economy could be heading back into recession, surveys showed on Wednesday. 

A downturn that began in smaller members of the 17-nation bloc has hit the core, and survey compiler Markit said the latest figures suggest the region's economy will contract in the fourth quarter unless business and consumer confidence rallies.
   
"We can't rule out the possibility of recession in the coming quarters. Combined with the global slowdown you have the main growth engine of the euro zone economy, Germany, stuttering," said Jeavon Lolay, head of global research at Lloyds Banking Group. 

A US report showed the private sector added more jobs than expected in September but pointed to an economy continuing to tread water. A more authoritative government report on the employment situation is due Friday. 

US private-sector employers added 91,000 jobs in September, above economists' expectations, a report by a payrolls processor showed on Wednesday.

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 75,000 jobs.  

"The ADP profile for the last two months is one of moderate job gains and not something more dire," said Jonathan Basile, an economist for Credit Suisse in New York. 

European concerns about flagging activity were mirrored in India's service sector, which also shrank in September as new business tapered off, two days after a global manufacturing survey showed the first drop in output since June 2009, though firms still took on more workers.

Figures due at 10 am (1400 GMT) from the United States are expected to highlight weakening services growth, though data on Monday showed the manufacturing sector in the world's biggest economy expanded at a faster pace than expected.

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 -- combining the services and manufacturing data published earlier this week and a good guide for economic 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 percent, but Markit 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," Markit's chief economist Chris Williamson said.

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

Ailing stock markets bounced Wednesday after Europe's finance ministers agreed to shore up euro zone banks against the spreading debt crisis, though contagion fears kept the euro close to a nine-month low against the dollar.  

Britain's service sector unexpectedly picked up pace in September, though firms' expectations for the next 12 months are bleak, and Britain's economic growth in the second quarter of this year was unexpectedly revised down to 0.1 percent, official data showed Wednesday.   

"It is pretty anaemic growth. What is happening in Europe is not helping the UK at all, but even fundamentally the UK economy is in a pretty weak spot at the moment," said Marchel Alexandrovich at Jefferies International.   

Earlier data from Germany, Europe's largest economy and the backbone of the euro zone'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. - Reuters
  




Tags: Europe | Private sector | PMI | Business Activity |

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