Eurozone economy has slowed sharply, business survey shows

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The eurozone economy has slowed sharply, according to a closely watched business survey that indicated that recent growth in the dominant services sector is stalling and price pressures are cooling.

The benchmark purchasing managers’ index, a measure of activity in manufacturing and services, fell to a five-month low of 50.3 on Friday’s data, down from 52.8 in the previous month. It was below the 52.5 reading forecast by economists in a Reuters poll.

By dropping towards the 50 mark that separates contraction from expansion, the figures damp hopes of an economic rebound in the 20-country single currency zone after two quarters of mild contraction.

“This is a severe slowdown,” said Carsten Brzeski, an economist at Dutch bank ING. “It shows the ECB forecasts were utterly over-optimistic. We are clearly heading for another weak quarter, with a possible flirtation with recession again.”

The European Central Bank had forecast gross domestic product in the bloc would grow at 0.9 per cent this year.

Economists said the flash PMI data could make ECB rate-setters more cautious about further interest rate rises beyond a rise the central bank says is “very likely” in July.

Investors pared back bets of another increase in September. Germany’s two-year government bond yield fell 13 basis points to 3.09 per cent, while the euro fell 0.6 per cent against the dollar to $1.089.

European stocks fell following the data, bringing to an end what is set to be their worst week since March. The region-wide Stoxx 600 fell 0.4 per cent, Germany’s Dax was 1.1 per cent lower and London’s FTSE 100 lost 0.5 per cent. The Stoxx 600 has declined 2.9 per cent this week.

The sign of a weakening economy came against the backdrop of hawkish central bank decisions earlier in the week, as Switzerland, Norway and the UK raised their benchmark rates to tackle stubbornly high inflation.

“These data aren’t pretty,” Claus Vistesen, an economist at research group Pantheon Macroeconomics said of the HCOB PMI figures, adding that the figures were consistent with eurozone growth remaining “subdued” in the second and third quarters of this year.

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The biggest surprise in the PMI data was the sharp slowdown in services, which has been one of the few positive areas of the eurozone’s economy for much of this year.

The slowdown was especially sharp in France, where activity levels among services companies contracted for the first time since the start of the year.

This contrasted with the UK services sector, which slowed less, but reinforced fears that inflation is more persistent than the Bank of England had hoped.

Eurozone input costs for manufacturers fell at their fastest rate since July 2009, suggesting the recent decline in the region’s industrial producer prices, which fell 3.2 per cent between March and April, is likely to continue.

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But input costs continued to rise for services companies at well above the historical average pace.

Workers’ wages in the bloc increased more than 5 per cent in the year to the first quarter. Unemployment fell to a record low of 6.5 per cent in April, which ECB officials fear is likely to keep services inflation high.

Eurozone inflation fell to 6.1 per cent in May. New data next week is expected to show a further decline to 5.7 per cent.

But the ECB — which targets headline inflation of 2 per cent — is likely to focus on the core rate. This measure, which strips out energy and food, is expected to rise from 5.3 per cent in May.

The PMIs also showed companies across the eurozone had become much more gloomy about their prospects.

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Weaker order flows are starting to hit demand for workers, with employment growth slowing in June for the second consecutive month.

Separately, German house prices fell at a record annual rate of 6.8 per cent in the first quarter of this year, as higher borrowing costs, inflation and weaker economic growth took their toll on Europe’s largest property market.