The euro zone economy took a significant hit in June from high oil prices and falling demand, data showed today, although the corporate pain will probably not be enough to deter the ECB from hiking rates in July.
A contraction in the closely watched PMI surveys, combined with weaker than expected data from Germany's Ifo survey, will add to fears of stagflation in the euro zone as growth cools quickly while oil prices stoke inflationary pressure.
Business weakness will complicate the European Central Bank's efforts to ready markets for a rate hike in July.
The RBS/Markit Eurozone Purchasing Managers Index for services companies, which range from cafes to banks, fell to 49.5 in June from 50.6 in May, the first time it has sunk below the 50.0 mark dividing growth from contraction since June 2003.
Only three of 36 economists had forecast a move below 50.0, with the lowest prediction being 49.7 and the median 50.5.
Euro zone manufacturing also suffered a bruising month. The RBS/Markit Eurozone PMI for the sector fell to 49.1 from 50.6, its lowest level since May 2005 as new orders slipped further. Economists had forecast a dip to 50.2.
Meanwhile, German business morale fell more than forecast in June to its lowest level since December 2005 with the Ifo index at 101.3 from 103.5 in May.
The euro hit session lows after the data to around $1.5501 to the dollar from $1.5559, while bund futures also rallied to session highs.
Earlier Flash data showed French growth in both manufacturing and services contracted in June, but remained above the 50.0 level in Germany, Europe's biggest economy.