Germany to feel pain as eurozone recession bites

The eurozone remains on course to sink into recession, a key survey of activity across the 17-nation currency zone showed yesterday. Markit's Composite Purchasing Managers' Index (PMI) for the euro area remained at 46 in June for the second consecutive month, with any figure below 50 signalling a contraction.

There were also further indications that the sovereign debt crisis is dragging down the continent's most powerful economy, Germany. The Composite PMI reading for Germany fell to 48.5 this month, down from 49.3 in May. This is the lowest level of the index in three years.

"The downturn is gathering pace and spreading across the region, with Germany on course for a marginal fall in GDP in the second quarter," said Markit's chief economist Chris Williamson. "Firms are preparing for conditions to worsen in the coming months, with the darker outlook often attributed to uncertainty caused by the region's ongoing economic and political crises."

In an indication of rising official concern at the pace of the downturn in the eurozone, there were unconfirmed reports last night that the European Central Bank is preparing to loosen its collateral rules when lending to private banks. The ECB has come under growing pressure to cut its 1 per cent interest rates at its next meeting to support the currency bloc's economy.

The weak survey data formed a bleak backdrop to a meeting of eurozone finance ministers in Luxembourg to discuss a bailout for the Spanish banking sector that was agreed in principle last weekend. The Spanish economy minister, Luis de Guindos, said Madrid will request assistance "in the coming days".

An audit of the sector by consultants Roland Berger and Oliver Wyman last night revealed the sector will require between €51bn (£41bn) and €62bn in the event a serious slump. But Spain is expected to request €100bn in loans from European partners to recapitalise its banks. Mr de Guindos said: "We have already started working on the design of the aid with the Commission, the European Central Bank and the International Monetary Fund".

The eurozone managed to avoid a return to recession earlier this year, after registering 0 per cent growth in the first quarter after a 0.3 per cent contraction in the final quarter.