Euro-zone factory activity fell at its steepest rate in more than three years in July, and export orders plunged despite a weakening euro, suggesting the economy will struggle to recover from its downturn any time soon.
German manufacturers suffered the largest fall in new export orders of any euro-zone country, giving one of the starkest signs yet that Europe's powerhouse economy—which is highly geared toward exports—is now flagging.
Markit Economics said Wednesday its monthly index of manufacturing activity in the 17-nation euro zone fell to 44 from 45.1 in June, dropping further below the 50 threshold that would signal growth to mark its worst reading since June 2009. July's figure was lowered from a preliminary estimate of 44.1.
"Manufacturing…looks to be on course to act as a major drag on economic growth in the third quarter, as the euro zone faces a deepening slide back into recession," said Chris Williamson, Markit's chief economist.
The economy failed to grow in the first quarter of the year, the latest for which official data are available. Figures for the second quarter will be published August 14, and most economists expect them to record a contraction.
The manufacturing PMIs will therefore increase the pressure on members of the European Central Bank's governing council to take action to support growth when they meet Thursday. Having cut the central bank's key interest rate to an all-time low in July, they are expected to focus on steps to reassure bond investors.
In a particularly worrying sign for the currency bloc, the Purchasing Managers Indexes suggest its largest economies are becoming increasingly fragile, raising questions about their ability to support the weaker nations through the debt crisis.
Manufacturing activity in both Germany and France, the two largest economies, fell at the fastest rate in more than three years. The PMI for Germany dropped to 43 from 45 in June.
New orders for export taken by German factories fell particularly sharply, a sign that overall activity will decline further in coming months.
"The German export machine remained firmly in reverse during July, recording the steepest drop in new orders of any country and the fastest rate of decline since May 2009," Markit said in its release.
Industry group VDMA Wednesday said new orders for Germany's plant and machinery industry fell 1% on an annual basis in real terms in June, with domestic orders up by 3% and export orders down to the same degree.
Falling demand for goods made in Germany and other euro-zone nations is a major blow for the economy, leaving it with few obvious sources of growth as government austerity and rising unemployment suppress consumer spending at home. Weakness in export orders comes despite a marked fall in the euro in recent months, sparked by investor fears about the debt crisis. Normally, that should boost foreign demand for euro-zone goods by making them cheaper.
The PMIs gave an early sign that Europe's weaker economies could be nearing bottom. Spanish manufacturing contracted again in July but at a more gradual pace, its PMI rising to 42.3 from 41.1. In Greece, the economy most devastated by the debt crisis, the PMI rose to 41.9 from 40.1.
Despite the modest improvement, the PMIs for Greece and Spain still point to sharp drops in activity. But Ireland's PMI rose further above the 50 threshold to 53.9 from 53.1, its third straight increase.
Meanwhile, outside the euro zone, the contraction in the U.K.'s manufacturing sector deepened sharply in July to the lowest level since May 2009, data from Markit and the Chartered Institute of Purchasing & Supply showed Wednesday.
The figures come hot on the heels of lender Nationwide's disappointing U.K. house price index, and suggest the recession-hit economy has a tough road to recovery as confidence and demand plummet. The PMI for the manufacturing sector slumped to 45.4 in July from June's 48.6.
The details of the PMI survey show that output and orders slumped in July. Export orders were weighed down by a drop in demand from Asian clients, as well as continued weak order levels from the euro zone.
"A perfect storm of wet weather and weak confidence in the U.K. has combined with global economic drift to engulf the manufacturing sector in July," said David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply who jointly compiles the survey with Markit. "While the euro zone has continued to be the major factor, declines in business from Asia have dashed hopes of a quicker recovery."
Earlier Wednesday, Nationwide said U.K. house prices fell 0.7% from the previous month and 2.6% on an annual basis. The lender said the fifth monthly decline since the beginning of the year and the deepening annual drop reflects not only the impact of the wet weather, but also the weakness of the wider economy and continuing tight lending conditions.
"The weaker price trend observed in recent quarters is unsurprising, given the disappointing performance of the wider economy," Nationwide's chief economist Robert Gardner said.
