LONDON (Reuters) - Euro zone business growth was much weaker than expected this month, hurt by a deepening contraction in manufacturing, and forward-looking indicators in surveys published on Wednesday suggest conditions will get worse next month.
The downturn appears widespread, with survey results missing expectations in the euro zone as well as in Germany and France, the bloc’s two biggest economies and the only ones to report preliminary data.
That will make disappointing reading for policymakers at the European Central Bank, who are expected to signal on Thursday a bias towards cutting its already-negative deposit rate this year to try to boost growth and inflation.
IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI), considered a good guide to economic health, dropped to 51.5 this month from a final June reading of 52.2, missing the median expectation in a Reuters poll for 52.1 and closer to the 50 mark separating growth from contraction.
“If the European Central Bank takes this release seriously at tomorrow’s meeting, it would nudge them more towards quick action. This is an important first look at how the third quarter has kicked off and it does not look good,” said Bert Colijn at ING.
Five of 67 economists polled by Reuters expected the ECB to cut its deposit rate on Thursday.
The euro fell to a two-month low against the dollar on Wednesday, hit by the weak economic data and speculation the ECB may start easing policy as soon as this week.
IHS Markit said the PMI suggested economic growth of 0.2% - or possibly as low as 0.1% - this quarter, weaker than the 0.3% predicted in a Reuters poll.
A PMI for the bloc’s dominant service industry fell to 53.3 from June’s 53.6, matching the median Reuters poll forecast.
Manufacturing activity contracted for a sixth month and at its sharpest rate since late 2012. The factory PMI fell to 46.4 from 47.6, below all forecasts in a Reuters poll which had predicted no change from June’s reading.
An index measuring output, which feeds into the composite PMI, sank to 47.0 from 48.5 - its lowest reading since April 2013.
“The euro area PMI data paint an ever more worrying picture of the state of the manufacturing sector, but at the same time the service sector continues to defy gravity,” said Jan von Gerich at Nordea.
Earlier figures showed that a recession in Germany’s manufacturing sector worsened this month, with the performance of goods producers dropping to the lowest level in seven years, suggesting a deteriorating growth outlook for Europe’s largest economy.
Meanwhile, French business growth slowed unexpectedly as political tensions and trade disputes weighed on the euro zone’s second-biggest economy.
Demand for manufactured goods fell at the second fastest rate in over six years in the euro zone and factories again turned to completing old orders to stay active. The backlogs of work index fell to a seven-year low of 43.3 from 45.5.
Services firms also suffered from weak demand and cut back on hiring. The employment index fell to 53.5 from 54.2.
As forward-looking indicators were painting a downbeat picture, businesses across the euro zone grew less optimistic. The future output index fell to 58.5 from 59.2, its lowest since October 2014.
Editing by Gareth Jones