Euro zone growth halts as Germany's activity shrinks

Bloc's biggest economy sees private sector sag amid recession in manufacturing: Survey

The free harbour in Bremerhaven, Germany. The German government said earlier that the country was not facing a bigger downturn or pronounced recession after contracting slightly in the second quarter. But several institutes have said that the economy
The free harbour in Bremerhaven, Germany. The German government said earlier that the country was not facing a bigger downturn or pronounced recession after contracting slightly in the second quarter. But several institutes have said that the economy will slide into recession this quarter. PHOTO: ASSOCIATED PRESS

LONDON • Euro zone business growth stalled this month, a survey showed yesterday, dragged down by shrinking activity in powerhouse Germany, where a manufacturing recession deepened unexpectedly.

Yesterday'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 guide to economic health, suggested support is needed for stuttering activity.

It sank to 50.4 this month from 51.9 last month 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 per cent in the second quarter, official data showed last month. The average PMI for this quarter suggests that growth could now be weaker.

Economist Jack Allen-Reynolds of Capital Economics said: "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."

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 will leave next month.

Earlier figures from Germany, Europe's largest economy, showed that private sector activity shrank for the first time in 61/2 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 government 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 that the economy will 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 fell as recession fears deepened. The euro also fell against the dollar.

A flash services PMI for the bloc fell to 52 from 53.5, below all forecasts in a Reuters poll; a manufacturing index fell to 45.6 from 47, a low not seen since October 2012. The 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," Mr 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 low of more than seven years.

But overall optimism picked up from last month's six-year low. The future output index edged up to 55.7 from 55.4.

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

Economist Tuuli Koivu at Nordea Markets said: "The weak data supports 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."

REUTERS

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A version of this article appeared in the print edition of The Straits Times on September 24, 2019, with the headline Euro zone growth halts as Germany's activity shrinks. Subscribe