Survey points to deepening eurozone recession despite signs of improvement in debt crisis

LONDON – Europe appears headed for a deepening economic recession despite a recent easing in market concerns over the three-year debt crisis, a closely-watched survey found Thursday.

Financial data company Markit said its purchasing managers’ index — a gauge of business activity — for the 17-country eurozone fell to 45.9 in September from 46.3 the previous month.

The decline was a surprise as the consensus in the markets was for a modest improvement. Anything below 50 indicates a contraction in economic activity.

September’s rate was the lowest in over three years and came despite an easing in the rate of economic contraction in Germany, the eurozone’s largest economy.

The decline also highlights the scale of the challenge facing European policymakers as they seek to get a grip on the debt crisis and may fuel hopes that the European Central Bank will cut its main interest rate further from the record low of 0.75 per cent.

Over recent weeks, stocks in Europe have pushed up to multi-month highs, while the euro has reversed course and headed above $1.30 for the first time since the spring.

Markets were driven by a series of apparent breakthroughs in European leaders’ efforts to solve the debt crisis.

Most importantly, the ECB announced a new bond-buying plan that would keep a lid on the borrowing costs of countries like Spain and Italy. Expectations that countries would sign up for the plan, which comes with terms attached, have helped bring down bond yields.

But while markets may have improved, economic activity is still on the wane.

“The fall in the PMI in September is another reminder that the ECB’s new asset purchase programme is not an answer to all of the region’s problems,” said Ben May, European economist at Capital Economics.

The euro was down 0.8 per cent at $1.2940 an hour after the survey’s release.

Analysts said the figures suggest the eurozone economy is contracting at a sharper rate than the 0.2 per cent quarterly decline recorded in the second quarter of 2012. Conditions in both the manufacturing and services sector worsened.

“The latest readings not only suggest that the euro area has been in recession over the past six months, but also augur ill for the final quarter of the year,” said James Ashley, senior European economist at RBC Capital Markets.

Ashley said the PMI readings suggest economic output may have fallen by 0.5 per cent in the third quarter, equivalent to an annualized decline of just over 2 per cent.

He said, however, that he remains “comfortable” with his existing forecast of a 0.3 per cent quarterly decline.