Business activity in France and Germany grew at its weakest pace in more than two years in September and new orders fell for a third month, a survey showed, underscoring a loss of momentum in Europe's largest economies at a critical time for the euro zone.
Markit's German composite output index — a snapshot of the economy's health that combines services activity with manufacturing output — dropped to a flash reading of 50.8 from 51.3 in August, purchase managers' data showed on Thursday.
The reading was the lowest since July 2009, hovering just above the threshold of 50 that separates growth from expansion.
"The recovery in Germany's private sector economy is teetering on the brink, with both manufacturing and services growth close to stagnation," said Tim Moore, senior economist at Markit.
Germany has been one of the best-performing economies in the industrialized world since the end of the 2008 financial crisis. Yet gross domestic product growth slowed more than expected in the second quarter to just 0.1 percent, raising questions over whether Germany can continue to support expansion in the region.
"We could see only very modest growth in the third quarter and possibly even a contraction in the fourth quarter," said Chris Williamson, also an economist with Markit.
"The recovery in Germany is really flagging. We have a contracting periphery, less demand from export markets and at the same time a big hit to confidence at home," he added.
German exports fell more than expected in July.
The survey corroborated the gloomy trend shown by forward-looking German indicators of late, and comes after a string of downward revisions to German growth forecasts last week.
The government has said it still expects growth of 3 percent in 2011.
German investor sentiment fell to its lowest level in nearly three years in September on worries about the euro zone debt crisis, according to the ZEW think tank's monthly survey, released on Tuesday.
The Ifo index, considered the best indicator of future underlying economic trends in Germany, is due next Monday.
The PMI index tracking the manufacturing sector slipped to 50.0, a two-year low, while a measure of the services sector fell to 50.3, a 26-month low. Economists in a Reuters poll had forecast 50.1 and 50.5 respectively.
Williamson highlighted the fact that service providers' business expectations for the coming year slipped below 50 for the first time since April 2009, a clear harbinger of future woe. The reading stood at 48 in September, having plunged from a level of 66.3 in January, a seven-year peak.
A fall in the output price index might reassure the European Central Bank, but also showed that in a weaker climate producers were unable to pass costs on to customers.
France PMI Weakest Since 2009
French private sector activity grew in September at the slowest pace since France emerged from recession in 2009, a purchasing managers' survey showed on Thursday, suggesting the euro zone's second-biggest economy is mired in a rut.
With flows of new orders slipping, French manufacturers and service providers are shifting into downturn mode and trimming back on staff numbers, according to the survey.
"Anecdotal evidence (from the survey) suggested that the escalating euro zone debt crisis had taken a toll on confidence, and this appears to have fed through to the real economy in the form of a dampening of demand and activity," survey compiler Markit's senior economist Jack Kennedy said.
The flash Markit manufacturing purchasing managers' index (PMI) fell to a 27-month low of 47.3 in September from 49.1 in August, falling short of a Reuters poll forecast of 48.5.
The reading marked the second month running that the index came in below the key 50-point threshold between a contraction and an expansion in activity.
Service sector activity continued to expand, but nonetheless slowed. The services PMI fell to a 25-month low of 52.5 from 56.8 in August. The reading missed economists' expectations for a decline to 54.5.
In a sign of future weakness, service providers flagged the weakest growth in new work since November 2010 while manufacturers saw their new orders fall at the sharpest pace in 28 months, according to Markit.
Both sectors reported cuts in headcount numbers, also suggesting companies are buckling up for tougher times in the months ahead.
The overall composite PMI, bringing together the manufacturing and services sectors, fell to a 26-month low of 50.7 from 53.7 in August.
The reading was the lowest level since July 2009, just after France came out of the recession triggered by the global financial crisis.
"PMI data for a third quarter as a whole imply a considerable loss of underlying momentum in the French economy, suggesting another weak quarterly GDP figure is on the cards," Kennedy said.
The Bank of France forecast that the French economy eked out growth of only 0.1 percent in the third quarter after stagnating in the previous three months.
The French government is counting on growth for the whole of 2011 of 1.75 percent to meet its deficit-cutting targets, but many economists expect an even weaker rate in the face of Europe's worsening debt crisis.
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