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By Jonathan Cable
LONDON (Reuters) -Euro zone business activity contracted sharply and unexpectedly this month as the bloc's dominant services industry flatlined while a downturn in manufacturing accelerated, a survey showed on Monday.
The downturn appeared broadbased with Germany, Europe's largest economy, seeing its decline deepen while France - the currency union's second biggest - returned to contraction following August's Olympics boost.
That fuelled bets of more policy easing by the European Central Bank and the euro fell sharply, on track for its biggest daily fall against the dollar in more than three months.
HCOB's preliminary composite euro zone Purchasing Managers' Index (PMI), compiled by S&P Global, sank to 48.9 this month from August's 51.0, below the 50 mark that separates growth from contraction for the first time since February.
A Reuters poll predicted a modest decline to 50.5.
"As the Olympic flame was extinguished, so was euro zone optimism. The August uptick in the PMI was met by a sharp decline in September. This further fuels growth concerns in the bloc as inflation worries fade," said Bert Colijn, an economist at ING.
Overall demand fell at the fastest rate in eight months. The new business index plunged to 47.2 from 49.1.
A services PMI sank to 50.5 from 52.9, below all expectations in the Reuters poll which had predicted a more modest decline to 52.1.
Euro zone government bond yields tumbled on the data, with yields on German debt falling the most.
Germany's economy contracted 0.1% in the second quarter and Monday's survey suggested it had extended its downturn in the third. A recession is normally defined as two consecutive quarters of contraction.
"A technical recession seems to be baked in," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, forecasting Germany's economy would shrink by 0.2% this quarter.
PRICE PRESSURES EASE
The drop came despite firms increasing charges at a shallower rate. Services inflation eased and the output prices index came in at 52.0 versus August's 53.7, its lowest reading since April 2021.
"The one positive development is that price pressures are easing. This will be reassuring for the ECB and perhaps raises the chance that policymakers will cut the deposit rate again in October," said Andrew Kenningham at Capital Economics.
On Sept. 12 the ECB cut interest rates again and signalled a "declining path" for borrowing costs in the months ahead as inflation slows and economic growth in the euro zone falters.
The ECB should keep cutting interest rates gradually, its chief economist said last week, but may need to speed up cuts if the economy faltered.
Central banks around the world are easing monetary policy. China's central bank supplied cash to its banking system for the first time in months on Monday while the U.S. Federal Reserve kicked off an anticipated series of rate cuts last week with a larger-than-usual 50 basis point reduction.
Meanwhile, in Britain - outside the European Union - businesses also reported a slowdown in growth this month, potentially encouraging the Bank of England to consider cutting interest rates again.
A PMI covering euro zone manufacturing, which has been sub-50 for over two years and was forecast at 45.6, dropped to 44.8 from 45.8. An output index fell to 44.5 from 45.8.
Business optimism waned, suggesting purchasing managers do not expect an imminent turnaround, while the factory future output index sank to an 11-month low of 52.0 from 57.5.
(Reporting by Jonathan Cable; Editing by Christina Fincher)
