LONDON—Private-sector activity in the euro zone shrank in December, a clear sign that the region is heading back into recession and complicating efforts to contain its long-running debt crisis.
But a fall in inflation could give the European Central Bank some leeway to support economic activity.
Markit Economics said Wednesday its composite purchasing managers' index for the manufacturing and services industries rose to 48.3 in December from 47 in November. Though the latest reading is above the preliminary "flash" figure of 47.9, published last month, the sub-50 figure still means business activity in the 17-nation currency bloc contracted in December. It has done so for four months—including the whole of the fourth quarter.
"The uplift in the euro-zone PMI in December does little to dispel fears of the region sliding back into recession," said Chris Williamson, Chief Economist at Markit.
He said the survey indicates the euro-zone economy shrank in the fourth quarter for the first time since mid-2009, and predicted a further decline in the first quarter of 2012. That would mean two consecutive quarters of falling output, putting the euro zone officially in recession.
An economic slowdown would complicate efforts by euro-zone leaders to put their finances in order and regain investor confidence, a prerequisite for ending the debt crisis that has pushed Greece, Ireland and Portugal into receiving bailouts and could yet threaten others including Italy and Spain.
Those two countries continued to report heavy falls in output in December, with readings sharply below the breakeven threshold of 44.2 and 42.1.
The ECB cut its key rate by a quarter point in both November and December, as growing fears of a downturn outweighed a rise in inflation to levels above those that prompted the bank to raise rates earlier in the year. A preliminary reading of inflation for December on Friday suggested prices may now wane, giving the ECB more room to maneuver to support the economy.
Eurostat, the European Union's official statistics agency, said its initial estimate of annual inflation in the euro zone fell to 2.8% in December, from 3% in November. That is the first drop in six months, although it still leaves inflation far above the ECB's target of just below 2%.
"In our view, December's drop [in inflation] marks the beginning of a relatively rapid descent back to the ECB's medium-term target," said Martin van Vliet, economist at ING Bank, predicting that rises in energy prices a year ago won't be repeated this year—pushing inflation down.
He said that while the ECB governing council is likely to "keep its powder dry" and hold policy steady at its meeting next week, there is a decent chance it will cut the key rate again in the coming months.
The first official reading of euro-zone GDP for the fourth quarter will be published in February. The economy grew 0.2% in the third quarter, slowing sharply from growth of 0.8% in the second quarter.
Markit's surveys gave further evidence of a two-speed economy in the currency bloc. While Spain and Italy contracted, business activity in Germany, the region's most powerful economy, returned to growth in the final month of the year. It posted a reading of 51.3. France, the second-largest euro-zone economy, stopped contracting with a break-even 50 figure.
With its economy seeming to flag, the French government is now focused on finding ways to boost growth, Finance Minister François Baroin said Wednesday.
Data published by France's statistics agency Wednesday showed consumer spending—the country's main growth engine—falling 0.1% in November from October, missing forecasts for a rise.
