Business activity in the euro zone is contracting for the first time in more than two years, according to a closely watched survey, the strongest evidence to date that the global slowdown and Europe's debt crisis are pushing the euro bloc to the brink of recession.
The decline in the purchasing managers index for the euro zone in September contributed to a selloff in global equity markets and the euro.
"My feeling is we are probably headed towards a recession in Europe," says Maria Carrozza, financial director of Pizzorno Environnement SA, a waste-management company with yearly sales of around €200 million ($271 million) that does 80% of its business in France.
The euro-zone PMI for September slid 1.5 points to 49.2, according to data provider Markit, signaling contraction by falling below the 50 mark for the first time since July 2009. The new-orders component of the survey also declined, suggesting further weakness ahead.
A separate report showed euro-zone industrial orders down 2.1% in July from June. Consumer sentiment fell in the currency zone to a two-year low.
The growing signs of economic stress may force the European Central Bank to reverse its recent interest-rate increases to avert a deeper downturn, analysts said.
"I'm increasingly of the view that the ECB will cut by the end of the year; the economic numbers are just that bad," says Howard Archer, economist at consultancy IHS Global Insight.
The PMI scores for France and Germany remained above the 50 mark, albeit barely, suggesting that other economies could contract more sharply than the eurowide average suggests. Details for other euro-zone countries will be released in early October.
Euro-zone gross domestic product rose only 0.7% in the second quarter, at an annualized rate, after expanding more than 3% in the first quarter. Economists expect it to skirt recession this quarter, thanks largely to an expected pickup in German growth.
Gains in industrial production and consumer spending in July, and a jump in automobile registrations last month, should power Germany to growth of around 1.5%, at an annualized rate, this quarter. The real recession risk for Europe is the fourth quarter and early 2012, economists say.
Yet many German executives are cautiously upbeat, confident that low unemployment at home and continued demand for German machine tools and other manufactured goods from abroad will be enough to weather the slowdown.
"We are actually in a good position," says Klaus Förtsch, managing director of Fendt-Caravan GmbH, based near Munich, which supplies caravans and motor homes to mainly Northern European markets. He expects orders within Germany to climb 10% this year from 2010, more than offsetting slumping sales in Italy and Spain, which are a small market for his company.
Mr. Förtsch has cautiously expanded his 660-person staff in the past six months, and says low unemployment in key Northern European markets, including his home region of Bavaria, will support consumption. A sign of confidence: Fendt-Caravan recently spent €4 million expanding its production line.
Germany's export-driven economy benefited more than any other developed country from the revival in global demand last year, particularly in fast-growing emerging markets such as China and Brazil. But those countries are taking steps to cool overheating economies and head off a rise in inflation. China's PMI, also released Thursday, fell to 49.4.
"A lot depends on China," says Karl Haeusgen, chief executive of HAWE Hydraulik, a Munich-based maker of valves and hydraulic systems. Despite "significant cooling" in business from China, his largest export market, Mr. Haeusgen expects production levels to rise 40% this year and another 10% in 2012, due in part to stronger demand from U.S. clients.However, "the euro crisis, if it is not solved in the next two or three months, will have an effect," he warns.
Even if Germany is able to generate 1% or 1.5% GDP growth, enough to keep its unemployment rate low, it needs to expand much faster to keep the currency bloc as a whole from contracting, economists say.
Until recently, Europe's economic troubles were centered in Greece, Ireland and Portugal, which only combine for about 6% of euro-zone GDP. But growing financial strains in Italy and Spain are adding to pressure in the region's third and fourth-largest economies.
Italy's government on Thursday shaved its GDP forecasts, and now sees sub-1% growth through 2013, making it even harder to service its large debt load. "My phone's not ringing," says Luca Peotta, owner of a small industrial-furnace manufacturer, UniReforn, based near Turin in Italy's industrial northwest. Revenue has declined to an estimated €1 million this year, compared to €2 million in 2008. "Everything is frozen, because you can't see what's coming around the corner. You see nothing," he says.
Four months ago, Mr. Peotta's orders from major aeronautics and auto companies appeared to be picking up, raising his hopes of returning to growth in 2012.
Instead he's back to cutting costs so that he can break even this year. He is postponing plans to hire new workers and buy machinery, and even weighing whether to stop paying himself a salary, as he did for seven months in 2009.
read more: Olympus Wealth Management
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