06/21/2012 04:00 am ET Updated Aug 20, 2012

Eurozone Crisis Causing 'Deeper And More Broad-Based' Economic Downturn

 Composite PMI suggests 0.6 pct Q2 contraction

 Manufacturing, composite PMIs lowest since June 2009

 Services expectations lowest since March 2009

 Manufacturing output lowest since May 2009

By Jonathan Cable

LONDON, June 21 (Reuters) - The downturn in the euro zone's private sector is becoming entrenched, business surveys showed on Thursday, as falling new orders and employment levels dent confidence.

June is the fifth consecutive month activity across the 17-nation bloc has declined, dragging down heavyweights Germany and France and likely increasing calls for the European Central Bank to take action to support the economy.

Markit's Eurozone Composite Purchasing Managers' Index, a combination of the services and manufacturing sectors and seen as a guide to growth, held steady at 46.0 this month, the lowest since June 2009 when the bloc was mired in a deep recession.

That was better than a slide to 45.5 predicted by economists but the index has been below the 50 mark that divides growth from contraction in all but one of the last 10 months.

"It is a worryingly steep downturn we are seeing and it is spreading from the periphery, which has been falling at an increased rate, through to Germany. It is becoming deeper and more broad-based," said Chris Williamson, chief economist at Markit.

The data pointed towards a second quarter contraction of around 0.6 percent, Markit said.

Having held steady at the start of the year, the bloc's economy will contract 0.2 percent in the current quarter and narrowly escape recession by stagnating again in the next, according to economists polled by Reuters last week.

While the ECB is not seen cutting interest rates from their record low of 1.0 percent anytime soon, a growing and significant minority are saying the bank will be forced to act as the outlook worsens.

The danger of Greece crashing out of the euro zone eased after pro-bailout parties won weekend elections, but risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.

The two-and-a-half year old crisis has hobbled the global economy, and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.

With uncertainty reigning, optimism among survey participants dwindled to its lowest level since March 2009. The business expectations index for services firms slumped to 50.8 from May's 57.4, the biggest one month drop since the aftermath of the Lehman Brothers collapse in late 2008.

"Companies are getting increasingly rattled by the crisis that is engulfing the region, and there are clear knock-on effects for the real economy," Williamson said.


The PMI for the dominant service sector nudged up to 46.8 from May's 46.7, beating expectations for 46.4, but chalking up a fifth straight sub-50 reading.

It was a similar picture in the manufacturing sector, which drove a large part of the bloc's recovery from the last recession, where activity declined for the 11th straight month.

Its 44.8 reading was the lowest since June 2009 and missed the 44.9 forecast. The output index for the sector fell to 44.4 from 44.6, the lowest since May 2009.

And things are unlikely to improve anytime soon as composite new business declined for the 11th month, with the index coming in at 45.2, just up from May's 44.6. The survey also showed that firms have been running down old orders for a year.

To reduce costs, and giving an indication of their prospects, factories reduced headcount for the fifth month, with the employment sub-index falling to 46.5 from 47.1, its lowest since January 2010.

"It's a sign that companies are expecting things to get worse and not better," Williamson said.

Earlier data from Germany, Europe's largest economy, showed its manufacturing sector contracted at its fastest pace since June 2009 while its service sector barely expanded, posting its lowest reading in seven months.

In neighbouring France activity declined in both sectors, albeit it at a more moderate pace than last month.