Euro-Zone Activity Declines Further

By ALEX BRITTAIN

The euro-zone economy declined further at the start of the fourth quarter, business surveys suggest, with sentiment in Germany—the euro zone’s biggest economy and key source of financial support—worsening markedly.

A survey of manufacturing and services companies showed Wednesday that activity in the 17-nation euro zone shrank at its fastest rate in over three years. Data company Markit said the preliminary version of its composite Purchasing Managers’ Index fell to 45.8 in October, down from 46.1 in September and far below the 50 threshold that separates growth from contraction.

“The euro zone has slid further into decline at the start of the fourth quarter,” said Chris Williamson, chief economist at Markit. He said the October reading is consistent with output in the 17-nation economy shrinking by more than 0.5% quarter-on-quarter in the fourth quarter.

Weak euro-zone data dent hopes that its economy will show signs of recovery following efforts by the European Central Bank and national governments in recent months to end the region’s debt crisis.

Signs that the euro zone’s economic troubles are worsening also contrast with an upturn in survey data in China. The preliminary PMI for the Chinese manufacturing sector rose to 49.1 in October from 47.9. The sub-50 reading marks a further decline, but the shallowest in three months.

In Germany, the PMI survey showed that a sharp deterioration in manufacturing activity drove the composite business activity reading down to 48.1 in October from 49.2 in September. Manufacturing is the heart of the German economy and the basis of its crucial export sector.

A separate poll of German businesses showed confidence at its weakest level in almost three years. The Ifo institute said its business confidence index fell to 100.0 points in October from 101.4 points in September. That is the lowest since February 2010, shortly before the first Greek bailout, and confounded economist forecasts for a modest rise.

“The clouds over the German economy are darkening,” Ifo President Hans-Werner Sinn said in a statement.

Wednesday’s data suggest that although Germany continues to escape the steep falls in output suffered by some of its euro-zone partners—particularly southern European countries such as Spain and Italy—the sovereign debt crisis is steadily chipping away at German growth. The economy expanded by 0.3% in the second quarter, down from 0.5% growth in the first three months of the year.

Germany’s central bank said Monday it expects the economy to stagnate or even shrink slightly in the fourth quarter, after continuing to grow in the third. Official data on economic output in the third quarter will be published in November.

The decline in German business confidence followed similarly gloomy surveys from France and Belgium Tuesday, with sentiment among manufacturers in two of the euro zone’s stronger economies falling to its lowest level for three years.

The declines in business confidence likely reflect continued uncertainty about the euro zone’s future, despite recent steps by policy makers to bind members closer together and some success in reducing yields on bonds issued by troubled governments.

Those same fears over the currency bloc’s future may not accurately reflect the economy’s current state. Official data on industrial production, construction and exports in July and August have suggested the economy may have avoided contracting in the third quarter.

Signs of a German slowdown Wednesday coincide with moderately better signs from some of its euro-zone partners. France’s composite PMI rose to 44.8 in October from 43.2 in September—still showing a steep decline, but slightly less than the previous month.

In Italy, a survey of consumer confidence edged higher as optimism over the economy improved, national statistics institute Istat said Wednesday. Consumer confidence in the euro zone’s third-largest economy rose to 86.4 in October from 86.2 in September.

Other data Wednesday showed the debts of euro-zone governments continued to rise relative to the total size of the currency area’s economy in the three months to June, despite austerity programs designed to cut spending and raise tax revenues.

The European Union’s official statistics agency Eurostat said that relative to the combined gross domestic product of the euro zone’s 17 members, government debt rose to 90% in the second quarter from 88.2% in the first quarter, and 87.1% in the second quarter of 2011.

Eurostat said 20 of the bloc’s members recorded a rise in government debt during the second quarter. The largest increases were recorded in Greece, Cyprus and Portugal.

Despite pursuing austerity programs, most euro-zone governments still spend more than they generate in tax revenues, and are therefore adding to their debts. In addition, many are experiencing economic contractions as a result of austerity programs, contributing to the rise in debt relative to GDP.

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