Eurozone PMI Shrinks as Optimism Fades

Index adds to fears of new recession

Private business activity in the euro one fell for the first time in two years in September with a drop in new orders, stoking fears that the region could be heading back into recession.

Markit's Eurozone Services Purchasing Managers' Index (PMI) dropped from its August level of 51.5 to 48.8; coming in under an earlier flash reading of 49.1 and marking its lowest level since July of 2009. It is also the first time it has dropped below 50, which marks the division between growth and contraction, since August 2009.

Reuters reported Wednesday that Markit expected growth for Q3 and Q4 to be even weaker than the 0.2% that economists have predicted. Chris Williamson, Markit chief economist, said in the report, "The malaise is spreading to the core, where surging rates of expansion earlier in the year have turned rapidly into contraction in Germany and only very modest growth in France."

He added, "A mild output contraction in September sits in stark contrast to the buoyant pace of expansion seen at the start of the year, suggesting that the economy will have stagnated in the third quarter as a whole. Even more disappointing is the steep drop in new business, which suggests that GDP will contract in the fourth quarter unless business and consumer confidence rally in coming weeks."

The business-expectations index polled some 4,000 firms ranging from financial services to restaurants, and found optimism considerably lower than earlier in the year. The index fell three points, to 54.6, from 57.6 in August; that is its lowest reading since April of 2009.

Although Britain's service sector saw an increase in September, its Q2 growth figure was revised downward to 0.1%. Germany already saw its economy nearly stagnate, as previously reported by AdvisorOne, and France is in a slump not seen in 26 months.

Added to the shrinking economies of Italy and Spain, the eurozone is experiencing a tough time, with a single bright spot being the first cut in prices by companies in more than a year as they struggle to keep business flowing. That could moderate inflation worries.

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