Eurozone heads back towards recession

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Fears that the eurozone is heading back into recession grew yesterday as sharp falls in consumer and business confidence showed energy sapping from the German and French manufacturing powerhouses and prompted more calls for a rate cut.

The 17-member eurozone's combined manufacturing and services output recorded its first decline since July 2009 this month, according to the latest purchasing managers' index compiled by Markit.

To make matters worse, orders for products made in the eurozone fell by 2.1 per cent in July, compared with June, suggesting the economic slump is set to continue, according to new figures from the Eurostat data office.

Chris Williamson, the chief economist at Markit, said the data "indicate that the eurozone probably stagnated in the third quarter, having slipped into contraction for the first time in just over two years in September".

He added: "Furthermore, the forward-looking indicators, notably an increased rate of decline of incoming new business and falling confidence about the year ahead in the service sector, raise the risk of further contraction in the coming months."

Carsten Brzeski, a senior economist at ING Group, said: "We are on the brink of recession," while Marco Valli, the chief eurozone economist at UniCredit Global Research, added: "The situation is deteriorating and we will see an industrial recession by the end of the year."

The weak figures indicate the extent to which business confidence and activity has been dented by the mounting eurozone debt crisis, concerns about the US economy and severe austerity programmes across much of the Continent.

They intensified calls for the European Central Bank (ECB) to take steps to boost the economy, by cutting interest rates and injecting cash into the system through a programme of quantitative easing (QE).

The ECB increased the interest rate by 0.25 percentage points to 1.5 per cent in July to curb inflation.

Howard Archer, chief European economist at IHS Global Insight, said: "Pressure is mounting on the ECB to quickly reverse its recent monetary policy tightening cycle rather than just halting it, with a near-term interest rate cut."

Among the data released yesterday, it emerged that Germany's juggernaut manufacturing sector has ground to a halt, with this month's PMI index reading falling to a two-year low of 50, the level that divides expansion from contraction. When Germany's service sector is factored in, the combined reading came in at a 26-month low of 50.8, down from 51.3 in August and barely in the black.

In France, the overall output index fell to a 26-month low of 50.7 and the manufacturing index fell further into the red, with a reading of 47.3. The overall eurozone reading this month is 49.2.

Data from Eurostat also gave a breakdown of manufacturing orders across the 27 countries of the EU. This showed orders for French products recorded the biggest decline in Europe, diving 11.2 per cent in July, compared with June, while orders for German products dipped 3 per cent. Orders for Swedish products recorded the biggest jump, of 5.8 per cent.