Euro zone businesses hit brakes as trade war stalls growth

Euro zone business growth slowed much faster than expected this month, dragged down by waning orders that put a big dent in confidence, adding to evidence the bloc's halcyon days are behind it for now, a survey showed.

October's disappointing survey is likely to concern policymakers at the European Central Bank, who are expected to end their bond-buying programme in less than three months, despite a slew of political and trade concerns. The economic slowdown comes amid an escalating trade war between the United States and China, a spiraling debt dispute in Italy, deadlocked Brexit negotiations and the prospect of steadily tightening financial conditions.

Both the euro and euro zone government bond yields dropped on Wednesday after the survey's release, with the single currency falling half a percent to $1.1417, its lowest since Aug. 20. Markets have taken a battering recently and European stocks were trading near a two-year low on Tuesday, down 20 percent from their peak, but the index rose 0.6 percent on Wednesday.

“The euro area economy is clearly suffering from the uncertainty created by the trade war and weaker global growth momentum, and the weakness is spreading to the domestic economy,” said Jan von Gerich at Nordea. “The weak PMI data clearly increase downside risks to the euro area growth outlook.”

Indeed, the outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists, who are also concerned about the US-China trade war and have repeatedly said euro zone growth is well past its peak.

ECB policymakers have slowly trimmed asset purchases, hoping they have done enough to bolster growth and inflation and are expected to hold policy steady on Thursday - despite evidence euro zone growth momentum peaked some time ago.

“Amid the fiscal stand-off between Rome and Brussels as well as increasingly jittery global markets, the ECB is likely to stress caution,” said Stephen Brown at Capital Economics.

IHS Markit said if the survey levels were maintained, they pointed to fourth quarter growth of 0.3 percent. That would be the slowest pace in 2 1/2 years and below the 0.4 percent predicted in a Reuters poll earlier this month.

Earlier figures from Germany, Europe's biggest economy, showed private-sector growth slowed to its weakest in more than three years as manufacturing and services both lost momentum. Germany's Chambers of Industry and Commerce, DIHK, last week cut its 2018 growth forecast and predicted a slowdown next year as the country faces mounting risks at home and abroad. It predicted 2019 growth of 1.7 percent, below a Reuters poll forecast of 1.8 percent.

However, it was a different story in France, the bloc's second-biggest economy. Its growth accelerated as strength in services offset weakness in manufacturing.

IHS Markit's Flash Composite Purchasing Managers' Index for the euro zone tumbled to a 25-month low of 52.7 from a final September reading of 54.1, significantly below the median expectation in a Reuters poll for a modest dip to 53.9. The lowest forecast was for 53.2.

Anything above 50 in the survey, which is regarded as a good guide to economic health, indicates growth.

Suggesting companies don't expect a rebound anytime soon, the future output index, which gauges optimism, fell to a near four-year low of 59.4. A similar reading from manufacturers fell to a level not seen in almost six years.

Manufacturers suffered a similar fate with their PMI sinking to 52.1 from 53.2, missing a median prediction for 53.0, as factory orders contracted for the first time since late-2014.