Eurozone outlook weak as business growth slows

City A.M. Reporter
Growth in the eurozone's dominant service sector slowed for the fifth consecutive month in August, expanding at its weakest pace in two years as expectations for the future plummeted, new data shows.

A persistent downturn among smaller members of the 17-nation currency bloc is now spreading to core economies like Germany that have long supported the region's fragile recovery, the data showed.

Data compiler Markit said unless business conditions improve, the eurozone economy risks contracting in the fourth quarter. A further contraction in the following quarter would put it back in recession.

"The PMI suggests that economic growth in the third quarter is unlikely to improve on the 0.2 per cent seen in the three months to June, and a contraction in the final quarter looks a distinct possibility unless business and consumer confidence improve noticeably in coming months," Chris Williamson at Markit said.

The Markit Eurozone Services Purchasing Managers' Index nudged down to 51.5 last month from 51.6 in July, its lowest reading since September 2009 but in line with an earlier flash reading.

The index has been above the 50 mark that divides growth from contraction for two years.

"A stalling of manufacturing growth, biting austerity measures and worries about the region's deepening financial crisis have all taken their toll on demand for services in the summer," said Williamson.

Optimism about the future also weakened with the business expectations index slumping to 57.6 from July's 63.4, its lowest reading since April 2009.

"The largest drop in optimism was seen in Germany, although steep falls were also evident in France, Italy and Spain, highlighting how malaise has spread from the region's periphery to the previously fast-growing core," he said.

A composite new business index, combining the services and manufacturing sectors, suggests the outlook will not improve any time soon. It fell to 49.8 last month, it's first sub-50 reading since August 2009 when the bloc was mired in a deep recession.

Germany's services PMI fell to a 22-month low of 51.1 although France's moved up to 56.8, despite a PMI released on Thursday showing its manufacturing sector contracted for the first time in two years.

Spain's service sector contracted for the second month running while Italy's shrank for the third consecutive month.