Euro-Area Economy Stalls as Manufacturing Pain Starts to Spread

(Bloomberg) --

The euro-area economy stagnated at the end of the third quarter, held back by an industrial recession and a sharper-than-expected slowdown in services.

While the slump still remains broadly centered on manufacturing, the measure for services dropped last month to the lowest since January after being revised down from an initial estimate. If that’s a sign that the weakness is spreading, it’s a worrying development for the euro-area economy.

A separate report showed U.K. services unexpectedly shrank, posting the weakest index reading since the Brexit referendum in 2016.

The euro initially weakened against the dollar, before recovering to little changed on the day. German bonds rose, pushing 10-year yields down 3 basis points to minus 0.58%. The pound was little changed against the dollar.

IHS Markit, which compiles the Purchasing Managers Index, said euro-area services exports fell for a 13th straight month. The headline German services index fell to the lowest in three years, while the French and euro-area measures also declined.

With manufacturing mired in a worsening crisis, that left the composite measure for the euro zone at 50.1. That’s the lowest in more than six years and barely above the 50 line that divides expansion from contraction.

Read More: World Economy Sends Up Flares as Manufacturing Slump Hits U.S.

The figures add to signs that trade tensions, weaker global growth and Brexit uncertainty are having increasingly devastating consequences for the region. The European Central Bank deployed fresh monetary stimulus last month to support growth, and its vice president, Luis de Guindos, said Thursday that risks are still tilted to the downside.

“The euro-zone economy ground to a halt in September,” said Chris Williamson, an economist at IHS Markit. He estimates that growth was 0.1% at best in the third quarter, and “the risk of recession is now very real.”

Trade remained a key source of concern for companies. Export orders experienced the sharpest decline since IHS began compiling those data some five years ago.

While businesses are continuing to hire workers, they are “increasingly looking to reduce overheads and tighten belts in the face of falling demand and an uncertain outlook,” Williamson said.

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