German dip sounds the alarm in eurozone

Bloc heads back into recession with ECB under increasing pressure to act

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The Independent Online

An alarming August slump for the eurozone giant Germany yesterday heaped more pressure on the European Central Bank to use its financial firepower to tackle the region's lingering debt crisis.

The deepest slide in more than three years for Germany's private sector looks virtually certain to condemn the eurozone to a double-dip recession, according to the financial information firm Markit's latest snapshot of the region's economic health.

Europe's economy suffered a seventh successive month of contraction during August as worsening conditions for services firms more than offset a slightly better performance from manufacturers. But even more worryingly, Germany's downturn gathered pace over the month as new business and export orders fell away at the fastest rate since April 2009.

The latest economic pain comes ahead of a crucial September ECB meeting at which markets expect president Mario Draghi to flesh out more details of the central bank's response to the crisis. Despite opposition from the Bundesbank, Mr Draghi has dropped clear hints that the ECB is ready to intervene to bring down the debt costs of eurozone strugglers such as Spain and Italy, both mired in recession as they look to cut their deficits.

Experts said it was up to the central bank to act to prevent the fallout of the crisis spreading further.

The ING Bank economist Julien Manceaux warned: "The combination of financial market tensions and fiscal austerity remains an important drag on domestic demand in the eurozone, with external demand too weak to have an offsetting impact. A turnaround in sentiment can only be expected when the future of the eurozone starts to look more secure. Unfortunately, that does not seem be happening anytime soon. The only player able to counteract these market tensions in the short run remains the ECB."

After a 0.2 per cent slide between April and June, another decline for the single currency bloc now looks unavoidable, condemning the eurozone to a technical double-dip, Markit said. Senior economist Rob Dobson said Germany's export engine had "slammed into reverse gear". He warned: "Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5 per cent to 0.6 per cent quarter-on-quarter, so it would take a substantial bounce in September to change this outlook."

The gloomy economic news emerges in a crucial week for the eurozone as Greece prepares to plead for extra time to meet the terms of its €130bn (£103bn) bailout. Greece's Prime Minister, Antonis Samaras, is set to ask for two more years to cut its deficit to 3 per cent to help its economy – mired in recession for the past five years – to return to growth. Inspectors from Greece's so-called "troika" of international lenders decide next month whether the nation will receive the next tranche of its rescue funds.

Disappointing manufacturing figures from China and the US also highlighted the risks that the eurozone's woes are posing to the global economy as business confidence falters.

August dog days: Gloom on economy

A tough August for the high street and a still-sluggish mortgage market offered few glimmers of encouragement for the economy despite better news on growth expected today.

The CBI's latest retail survey said sales were flat in the first two weeks, but traders are in their most pessimistic mood since the depths of recession in February 2009.

Mortgage lending recovered 10 per cent during July from a Jubilee-hit June but is well below the average of the past six months, the British Bankers' Association said. Credit conditions remain tough against a "subdued" economic backdrop.

The Office for National Statistics is preparing to revise its GDP forecasts higher for between April and June. The initial shock estimate of a 0.7 per cent fall is likely to be revised up to 0.5 per cent.