September 23, 2019 / 8:20 AM / 21 days ago

Euro zone business growth halts as Germany goes into reverse

LONDON (Reuters) - Euro zone business growth stalled this month, a survey showed on Monday, dragged down by shrinking activity in powerhouse Germany, where a manufacturing recession deepened unexpectedly.

FILE PHOTO: A steel worker of Germany's industrial conglomerate ThyssenKrupp AG stands a mid of emitting sparks of raw iron from a blast furnace at Germany's largest steel factory in Duisburg, Germany. REUTERS/Wolfgang Rattay/File Photo

Monday’s downbeat survey results come less than two weeks after the European Central Bank pledged indefinite stimulus to revive the 19-country currency bloc’s ailing economy.

IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good guide to economic health, suggested support for stuttering activity is needed.

It sank to 50.4 in September from 51.9 in August and was below all forecasts in a Reuters poll that had predicted a reading of 51.9. That was just above the 50 mark separating growth from contraction and was its lowest since mid-2013.

“Declines were broad-based, across countries and sectors. The composite measure fell to a new cycle-low in a sign that the economy may be inching closer to contraction,” economists at Morgan Stanley told clients.

The euro zone economy expanded 0.2% in the second quarter, official data showed last month, and the average PMI for this quarter suggests growth could now be weaker.

“With the euro zone’s manufacturing sector in the doldrums and services activity starting to lose pace, there is little reason to think that GDP growth will pick up as the ECB and the consensus forecasts assume,” said Jack Allen-Reynolds at Capital Economics.

The ECB trimmed its deposit rate further into negative territory on Sept. 12 and promised bond purchases with no end-date to push borrowing costs even lower — its last big policy moves under outgoing chief Mario Draghi, who leaves next month.

Earlier figures from Germany, Europe’s largest economy, showed private sector activity shrank for the first time in 6-1/2 years as a manufacturing recession deepened unexpectedly and growth in the service sector lost momentum.

While there are no signs of a turnaround yet, the German Economy Ministry said earlier this month that the country was not facing a bigger downturn or a pronounced recession after contracting slightly in the second quarter.

But several institutes have said the economy would slide into recession this quarter.

In France, the bloc’s second-biggest economy and the only other member for which flash numbers are published, growth slowed unexpectedly.

Global shares dipped after the weaker-than-expected data, and bond yields across the euro area tumbled as recession fears deepened. The euro EUR= fell against the dollar.

MANUFACTURING MALAISE

A flash services PMI for the bloc fell to 52.0 from 53.5, below all forecasts in a Reuters poll, while a manufacturing index fell to 45.6 from 47.0, a low not seen since October 2012. The Reuters poll had predicted 53.3 for services and 47.3 for manufacturing.

“Worryingly, there were also signs that the weakness in manufacturing is spilling over into services,” Allen-Reynolds said.

Indicating there will not be much improvement soon, a services new business index dropped to 50.9 from 52.3 and a manufacturing new orders index fell to 43.1 from 45.9, a more than seven-year low.

But overall optimism picked up a touch from August’s six-year low. The future output index nudged up to 55.7 from 55.4.

After easing policy this month some economists think the ECB will be forced to go further and Monday’s weak readings will do nothing to dissuade them.

“The weak data support our expectations that the ECB will have to ease monetary policy again in December. We expect another rate cut and an expansion of the asset purchase programme,” said Tuuli Koivu at Nordea.

Editing by Hugh Lawson and Catherine Evans

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