Eurozone private sector contracts further

Protesters have placed large effigies of (from L) German Economy Minister Philipp Roesler, German Chancellor Angela Merkel and German Social Democrats (SPD) Chairman Sigmar Gabriel in front of the Brandenberg Gate in Berlin German leaders are under pressure to save the eurozone

The eurozone's private sector contracted for a sixth straight month in July, a survey has indicated, driven by a slump in manufacturing activity.

Germany's factory output contracted at its fastest pace in three years, according to the data compiler Markit.

The news highlighted the dangers that core eurozone economies face from the bloc's debt crisis.

On Monday, credit ratings agency Moody's lowered its outlook for Germany, Netherlands and Luxembourg.

"The German manufacturing sector has been one of the key elements of the eurozone recovery and to see it contracting at this rate is really quite worrying," said Chris Williamson, chief economist at Markit.

Markit's composite Purchasing Managers' Index (PMI), which combines both the services and manufacturing sectors, was unchanged at 46.4 in July. Any reading below 50 suggests a contraction.

The reading for Germany's manufacturing activity was 43.3, a 37-month low.

Core problem

The data suggests "that things are getting worse", said Mr Williamson.

"The overall picture of stabilisation is masking an increasing problem in Germany and the core is being increasingly affected by the debt crisis."

Mr Williamson also said that the rate of decline in the eurozone's periphery economies was among the highest seen since the mid-2009.

The only bright spot was the French services sector which improved slightly, but was likely to be a temporary move, he said.

The drop in private sector economy has driven the pace of job losses to its highest level since January 2010. The eurozone unemployment rate jumped to a record high in May at 11.1%.

European stock markets fell sharply on Monday amid mounting speculation that Spain will need a full-blown sovereign bailout after its borrowing costs hit a record high.

Higher borrowing costs mean it will be more expensive for Madrid to borrow from international markets, making it more difficult for the government to turn around its economy.

Moody's decision to change its outlook to negative on Germany, Netherlands and Luxembourg was another blow for the eurozone, with the rating agency citing the increased likelihood that Greece would exit the single currency.

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