Euro zone services and manufacturing activity contracted for a fourth consecutive month in September, a key survey showed today.
Data from around 5,000 companies saw activity in both the dominant services sector and the manufacturing sector drop after making a small recovery in August and pointed to an economy at best in stagnation.
The Markit Eurozone Purchasing Managers' Index for services companies, ranging from cafes to banks, fell to a more than five-year low in August of 48.2 from 48.5 in August, but was just ahead of economists' expectations.
"It's not catastrophic if you look at the figure itself. The level is consistent with stagnation, not with recession, but it looks like the third quarter is going to be challenging to say the least," said Gilles Moec at Bank of America.
These challenging conditions are also predicted to hit ireland. GNP figures for the second quarter are due to be released on Thursday, with predictions from Davy Stockbrokers that it expanded quarter-on-quarter due to stronger exports.
However, in a research note this morning, analysts Rossa White said that while the economy may have avoided entering technical recession in the second quarter, it went into recession in the second half.
While Davy said goods exports volumes held up in the second quarter, services figures were likely to have disappointed when compared to rapid increases seen in recent years.
"Yet we expect a better performance than the dip in services exports in Q1. Interestingly, housing completions fell almost 30 per cent year-on-year in the quarter. The trend of recent months implies that 50,000 will be the total for the year. As a result, GNP may decline only marginally in 2008," it said.
The analyst said an analysis of payrolls, incomes, sales and production showed that the economy is already contracting. House completions are expected to drop sharply in the final half of the year. Combined with weak consumer spending, sluggish goods exports to the UK and falling residential investment, Davy is predicting it will lead to an official recession in the latter part of the year.
"All of those trends will be amplified in 2009, when we project that the economy will shrink both in real and nominal terms," it said.
Meanwhile, Euro zone manufacturing activity fell to a near seven-year low of 45.3 from August's 47.6, considerably below forecast and the 50.0 level that divides growth from contraction.
The news added pressure to an already falling euro.
A sharp fall in prices charged by companies in both sectors could make it easier for the ECB to consider interest rate cuts to encourage growth. Its last move, in July, was to raise rates to 4.25 per cent to fight inflation.
"Prices data are showing a welcome moderation," said Ken Wattret at BNP Paribas, but added: "On the output and input side, the readings are still too high for the ECB's comfort."
The ECB's focus on inflation has stopped it following the US Federal Reserve which has slashed interest rates to support growth. Euro zone inflation was at 3.8 per cent year-on-year in August, almost double the ECB's 2 per cent target ceiling.
Industrial orders in the euro zone were given a boost in July from volatile orders for ships, planes and
trains, official data showed today, but without them, orders fell for the third consecutive month, pointing to an economic slowdown.
Another official release showed French shoppers cut back on spending last month, with outgoings on manufactured goods falling 0.3 per cent.
Figures from research institute ISAE showed Italian consumer confidence well above expectations in September, with that index up to 102.8 from an upwardly revised 99.6 in August. However, that survey was taken before most of the recent financial turmoil.
The euro zone PMI survey is more recent, taken after markets went into a tailspin when U.S. investment bank Lehman Brothers filed for bankruptcy protection, Bank of America agreed a $50 billion takeover of Merrill Lynch and the U.S. government had to bail out insurer AIG.
The 10-year-old services survey showed confidence sinking with the business expectations index at a record low of 49.2.
The German part of the survey showed service sector activity in the 15-nation bloc's largest economy slipped into decline for the first time since January and France fared little better.
The composite index for the euro zone dropped to a near seven-year low, missing forecasts.
Reuters