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Factory data signal euro zone destined for recession

A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels.


The euro zone now looks destined for its second recession in three years, according to business surveys that showed the economic rot is even spreading through Germany, the region's largest and strongest economy.

The 17-nation bloc's economy will contract 0.5-0.6 per cent in the current quarter as orders for new business decline again, Markit's Purchasing Mangers' Index (PMI) suggested – far worse than the consensus in the latest Reuters poll.

A debt crisis which began in the euro zone's smaller economies is now hammering business and consumer confidence across the bloc, putting pressure on policy makers to take radical steps to help vulnerable countries such as Spain and Italy.

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The composite PMI, which measures manufacturing and services together, nudged up to 46.6, pipping forecasts for it to hold steady at July's 46.5. But that notched a seventh month below 50, the dividing line between contraction and growth.

More worryingly, the rot in smaller euro zone economies is now taking root in the core, with the flash composite PMI for Germany, falling to a three-year low and marking a fourth straight month of contraction.

"Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating, and further signs that its export engine has slammed into reverse gear," said Rob Dobson, senior economist at data compiler Markit.

Incoming orders for euro zone companies have now fallen for a year, with the composite sub-index at 45.0, above July's three-year low of 44.5.

Business activity in France, the second biggest economy that uses the euro as its currency, contracted for the sixth consecutive month, according to its composite PMI.

Société Générale, France's No. 2 listed bank, earlier this month joined its European rivals that have reported dismal second-quarter earnings as a result of the region's acute debt problems and weak economy.

The euro zone economy shrank by 0.2 per cent in the three months to June, according to official data. Economists polled by Reuters last week predicted a similar outcome for the current quarter, with no growth until the start of next year.

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Interest rates are already at record lows and the European Central Bank is expected to cut them by 25 basis points to 0.5 per cent when it meets next week, which analysts say will do little to stimulate lending.

The PMI for the dominant services sector fell to 47.5, missing expectations for a more modest fall to 47.6 from July's 47.9. That came as services firms cut the prices they charge for the ninth straight month.

The output prices index rose slightly to 47.2 from 46.8.

"The global economy is moving to a softer phase and companies are continuing to have to cut prices. The downturn is still led by the manufacturing sector," Mr. Dobson said.

The manufacturing PMI spent a 13th month below 50 but rose much more than expected to 45.3 from 44.0. The consensus from the Reuters Poll predicted a modest climb to 44.1.

An output index for the sector, which drove a large part of the bloc's recovery from the last recession, rose to 44.6 from last month's 43.4.

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Factories cut jobs a seventh consecutive month, but at a slower page, with the sub-index at 46.2, above July's 44.5.

Automaker General Motors' German unit Opel said last week it was in talks with workers to cut their hours in response to weakening demand.

That followed a move last month by the country's biggest steel maker, ThyssenKrupp, which said it would temporarily curb working hours at its five steel-making facilities.

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