Euro zone recession may have already started

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The euro zone's debt crisis might already have pushed the bloc's economy back into recession, according to business surveys that showed China's economy taking a stride forward in October.

Purchasing managers' indexes (PMIs) on Monday only served to underscore why Europe's leaders are scrambling to identify substantial and lasting measures to contain a sovereign debt crisis that knocked euro zone businesses into a second month of decline in October.

A European Union summit at the weekend showed some progress toward boosting the euro zone's bailout fund and recapitalising banks, but these measures might come too late to prevent a second recession in four years.

The flash Markit euro zone composite PMI, which measures business activity at thousands of manufacturers and service sector companies, sank to 47.2 this month from 49.1 - some way below the 50 mark that divides growth from contraction.

That was below every forecast from 19 economists polled by Reuters, to say nothing of the consensus for 48.8. Survey compiler Markit said it was consistent with a 0.5 percent rate of quarterly decline in gross domestic product.

“All in all this is a miserable report, highlighting the fact that the euro zone is falling into recession again,” said Peter Vanden Houte, chief euro zone economist at ING Financial Markets.

“The snail-like progress in the resolution of the European debt crisis is unlikely to alter this picture soon.”

Still, world stocks put in solid gains on Monday, following a rally on Wall Street on Friday, on comfort that China's economy may not be in as much danger as feared.

The China Flash PMI showed its vast manufacturing sector snapping a three-month run of contraction, thanks to robust domestic demand. Price pressures also eased, in perhaps the only positive common ground shared with the dire euro zone report.

Economists, who largely failed to see the Great Recession coming in 2008 until it had already started, were unusually frank about the significance of the surveys.

“If the euro zone can't slip into recession when it is facing the biggest financial crisis for generations and business surveys fall to the extent that they have done, when can it?” said Alan Clarke, economist at Scotia Capital.

Jeavon Lolay, head of global research at Lloyds Banking Group, agreed: “It definitely suggests recession from this point.”

A CRISIS OF CONFIDENCE

European leaders will meet again on Wednesday to flesh out proposals to fight the crisis, which emerged in Greece two years ago and threatens the solvency of economies as large as Italy and Spain, if left unchecked.

But there are sharp differences over how this should be done. French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis.

As if Europe's political elite needed any reminding just how the crisis has hurt confidence among Europe's consumers and companies alike, the euro zone PMI's business expectations index plummeted to its lowest level since March 2009, at the very nadir of the last recession.

“In all, this supports our view that even if euro zone policymakers implement a significant multi-faceted plan to deal with the region's fiscal problems, it will not address all the region's underlying economic problems or bring the euro zone crisis to an end,” said Ben May at Capital Economics.

Worryingly, services sector activity in France contracted in October for the first time in more than two years. The services PMI plunged more than 5 points to 46.0 from 51.5 in September.

Last week, Moody's said it could slap a negative outlook on France's coveted Aaa credit rating if slower growth stretches its budget too much - a downgrade the government has pledged to avoid.

Without this top-notch rating, the whole edifice of rescue measures for troubled peripheral euro zone states could begin to crumble, putting more weight on Germany, where there is a strong public backlash against bailouts.

The German economy - the main engine for euro zone growth this year - held up better than most in October thanks to a surprising surge in service sector activity. But the manufacturing PMI fell to 48.9 from 50.3.

CHEER FROM CHINA

HSBC's flash China manufacturing PMI, designed to give an early snapshot of the month's factory activity, rose to 51.1 in October from September's final reading of 49.9 as new orders and new export orders expanded.

“Thanks to the pick-up in new orders and output, the headline flash PMI rebounded back into expansionary territory during October, marking a steady start to manufacturing activities in the fourth quarter,” said Qu Hongbin, China economist at HSBC.

China is vulnerable to fading demand from the United States and Europe, its two biggest export markets. But robust domestic demand - consumption and investment - and solid export growth to emerging markets have provided some protection.

“Domestic demand conditions seem solid and enough to keep the economy growing by around 9 percent, judging from the rebound in the PMI from a low of 49.3 back in July,” said George Worthington, chief economist for the Asia Pacific at IFR Markets, a Thomson Reuters unit.

Economists in the latest Reuters poll published last week predicted China's growth rate would cool to 8.6 percent next year. - Reuters