March 5, 2012 / 1:19 PM / 8 years ago

Euro zone's private sector back in the doldrums in Feb: PMI

LONDON (Reuters) - A sharp downturn among Italian and Spanish businesses dragged the euro zone’s private sector back into decline last month, dashing hopes the region would avoid another recession, a survey showed on Monday.

Germany, the region’s healthiest economy, continued to expand, but at a slower pace, while economic activity in France stalled although the outlook for the coming months improved.

Markit’s Eurozone Composite PMI, which gauges the activity of manufacturing and services companies, slipped to 49.3 in February, revised down from a preliminary reading of 49.7 and below January’s reading of 50.4.

A reading below 50 denotes a contraction in activity, meaning Europe’s private sector has been stuck in a modest decline for five of the last six months.

“At this stage, our best estimate is that the region’s GDP will have contracted by 0.1 percent in the first three months of the year,” said Chris Williamson, chief economist at survey compiler Markit.

A Reuters poll of economists last month predicted the euro zone economy would shrink by 0.2 percent in the current quarter, pushing it into its second recession in three years. Recession is defined as two consecutive quarters of negative growth.

“Persistent weakness in countries such as Italy and Spain will also subdue any growth in other euro area countries, which traditionally depend on trade within the region, constraining recoveries in Germany, France and other northern euro nations,” Williamson said.

Spain’s service sector slump worsened significantly last month, according to PMI data released earlier on Monday, while Italian services business entered a ninth straight month of decline, with scant hope of growth returning soon.

Madrid defied the European Union on Friday by setting a new 2012 deficit target at 5.8 percent of gross domestic product - much softer than the 4.4 percent agreed with Brussels - saying the economy had deteriorated so much that the EU goal would be too tough to meet.

Euro zone unemployment edged up to 10.7 percent in January. The jobs component of the PMI survey suggested the labor market will not improve any time soon, declining to 49.1 from 49.4 in January and the worst showing since March 2010.

The service sector PMI, which represents the bulk of the euro zone private economy, also slipped back below the 50 mark in February, to 48.8 after touching 50.4 in January.

“The renewed contraction of the service sector in February is a major disappointment, and the weakness of the sector risks driving the euro zone back into another recession,” said Williamson.

New business levels at least declined at the slowest pace in six months in February, and there was some good news in business confidence hitting a seven-month high. But overall, the tone of the services PMI was gloomy.

“The fact that employment fell again in February reminds us just how uncomfortable companies are with the business outlook, with job creation slipping even in Germany,” Williamson said.

Reporting by Andy Bruce; Editing by Jonathan Cable and Susan Fenton

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