FRANKFURT (MarketWatch) — Activity across the euro-zone manufacturing and service sectors contracted in September, according to a closely followed survey of purchasing managers released Thursday, stoking fears the 17-nation region could slip into recession as it struggles with a sovereign debt crisis and an uncertain global economic outlook.
Markit Economics said its preliminary composite purchasing managers index dropped to 49.2 from 50.7 in August, marking the first time since July 2009 the index came in below the 50 level. A reading of less than 50 indicates a contraction in activity, while a reading of more than 50 signals growth.
“The fall in the euro-zone composite PMI below the theoretical 50 ‘no-change’ barrier provides the strongest sign yet that the region is on the cusp of a recession,” said Ben May, European economist at Capital Economics.
The PMI reading for the services sector plunged to 49.1 from a reading of 51.5 in August, while manufacturing PMI dropped to 48.4 from 49.0.
May said the decline in the composite index signals a potential quarterly fall in third- quarter gross domestic product of 0.5%, while the sharp drop in the services PMI indicates austerity measures and worries about the region’s debt crisis are taking a toll on domestic spending.
The data put added pressure on the euro , which fell to $1.3464 versus a broadly-higher dollar, down from $1.3618 in North American trade late Wednesday.
European equities fell sharply and U.S. stock index futures pointed to a lower open for Wall Street as global markets reacted to a slew of weak economic data and a warning on growth by the U.S. Federal Reserve. The pan-European Stoxx 600 Index dropped more than 3%.
The readings highlight worries about the fragility of the European and global economy as officials continue to wrestle with the euro zone’s turmoil-inducing debt crisis, which has stoked concerns about the region’s banking system.
The European Central Bank teamed up with other major central banks last week in announcing measures designed to ensure adequate dollar liquidity to institutions through the end of the year.
The European data follow a decline in HSBC’s preliminary China manufacturing PMI reading to a two-month low of 49.4, which indicated a broadening slowdown of the Chinese economy.
It also follows a warning by the U.S. Federal Reserve on Wednesday of “significant downside risks to the economic outlook, including strains in global financial markets.”
The euro-zone figures will put added pressure on the European Central Bank to begin reversing rate hikes delivered earlier this year, economists said. The ECB delivered two quarter-point hikes this year, lifting its key lending rate to 1.5% from 1%, but signaled earlier this month that actions were on pause as it weighs a deteriorating economic outlook and expectations inflation pressures will subside.
Marco Valli, chief euro-zone economist at UniCredit Bank in Milan, said the data likely won’t be enough to trigger a rate cut next month.
“Barring a further significant escalation of market tensions, we still believe that they are unlikely to deliver on the rate front, as their response at this stage will probably consist in stepping up unconventional measures,” he said.
Moreover, individual country data show that the slowdown has been broad-based, with growth rates in formerly surging Germany and France showing near stagnation in September, while the rest of the euro zone saw its steepest contraction in more than two years, he said.
For now, the current index level indicates the euro zone’s recovery has ground to a complete halt, said Martin van Vliet, an economist at ING Bank in Brussels.
“Today’s grim PMI figures reinforce our suspicion that the euro-zone economy as a whole might contract slightly in the second half of this year,” he said. “At the same time, with ongoing fiscal austerity and political leaders still way behind the curve in terms of resolving the debt crisis, we cannot dismiss the risk of a full-blown recession.”
William L. Watts is a reporter for MarketWatch in Frankfurt.
