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BRUSSELS - The 15-nation eurozone economy is teetering on the brink of recession, economists warned on Thursday in the wake of a string of weak data.
Facing record oil prices and a strong euro, business activity in the eurozone fell in July to the lowest level since just after the September 11, 2001 terror attacks, according to a widely watched survey.
"Economic growth in the eurozone is coming almost to a halt," said Bank of America economist Holger Schmieding. "This is the clear message from the dismal set of leading indicators published today."
The eurozone purchasing managers index (PMI), compiled by data and research group Markit, slid more sharply than expected in July to 47.8 points from 49.3 in June, according to an initial estimate.
Separate business confidence surveys from eurozone economic heavyweights Germany, France and Italy added to fears that Europe will not escape recession as it struggles with record inflation, tight lending conditions and weakening export demand.
German business sentiment fell to near a three-year low point in July, with a key index posting the sharpest drop since the September 11 attacks, according to the Munich-based economic research institute Ifo.
Meanwhile France's INSEE business climate index fell in July for the sixth month running to hit the lowest level since May 2005 while Italian business confidence dropped to a near-seven year low, according to research centre ISAE.
In Spain, the government slashed its economic growth forecast for this year to 1.6 per cent from 2.3 per cent as a housing boom that underpinned strong growth in the country for years turns to bust.
Outside of the eurozone, the news was equally dim with retail sales in Britain tumbling in June to record the biggest monthly drop for 22 years.
Despite a buoyant first quarter, economists said the chances are increasingly high that the eurozone economy shrank in the second quarter and that the third is getting off to an equally weak start.
"The available eurozone data already suggest that there is a chance that GDP (gross domestic product) contracted in the second quarter," said Ben May at Capital Economics.
"Unless we see a recovery in (business activity indicators) over the next couple of months there might even be another fall in the third quarter," he added.
If economic activity does indeed pull back in the second and third quarters, that would mark the first time the bloc has experienced a recession -- defined as two successive quarters of contraction -- since the euro was launched in 1999.
Despite the fast deteriorating economic outlook, the European Central Bank lifted interest rates this month to keep a lid on inflation, which hit a record 4.0 per cent in June.
"Will the recent news stop the ECB from raising? We are not sure," said UBS economist Stephane Deo. "We still expect inflation at 4.3 per cent in August:
way too high for the ECB.
"We think it is a close call but the odds for another hike have obviously declined today," he added.
Likewise, Bank of America's Schmieding said: "The data strengthen those at the ECB who had gone along only grudgingly with the July rate hike and now want to prevent any extra rate increase.
"With just a bit of bad luck, any further monetary tightening could possibly push the eurozone into a brief recession, in our view," he added.
- AFP/ir
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