S&P warns Europe crisis not over, France output falls

Ratings agency Standard & Poor's warned on Thursday that the euro zone crisis was entering a "stubborn phase of subdued growth" in what it says is a new stage in the region's economic crisis.

The warning comes as new data showed a deepening downturn in France's private sector economy during October.

Markit's Flash Composite Output Index (PMI) for France slipped to 48.0, from 48.4 in September. That was its lowest reading since February. A reading below 50 marks a contraction in private sector activity.

There was better news for the euro zone more broadly, however, as its composite PMI beat expectations, coming in at 52.2 in October, up from 52.0 in September. The reading was above all economist forecasts in a Reuters poll.

Euro alarm clock
Ulrich Baumgarten | Getty Images

'Sick man'

France has been dubbed the "sick man" of the euro zone over recent months. Gross domestic product (GDP) failed to expand during the second quarter of this year after stalling in the first, and is expected to have grown only slightly—by 0.2 percent—in the third quarter, according to the Bank of France.

"We believe that the euro zone's problems are still unresolved," said Standard & Poor's credit analyst Moritz Kraemer in a statement.

Further data released by Markit showed the private sector in Germany grew, offering some hope after a series of disappointing data for the euro zone's largest economy. German investor morale fell sharply in October, ZEW data showed earlier in October, while the latest industrial output figures also disappointed.

Germany's flash composite PMI for October climbed to 54.3 from 54.1 last month.

"The first reading of Germany's PMI for October shows that not everything in the euro zone's biggest economy is gloomy and doomy," Carsten Brzeski, chief economist at ING-DiBa, said in a note. "In our view, the state of the German economy is not as bad as disappointing August data and recent sentiment declines made some people believe."

'Policy complacency'

S&P revised its outlook on the long-term sovereign rating on France to negative earlier this month and cut Finland's rating to 'AA+', leaving only Germany and Luxembourg with 'AAA' ratings in the euro zone. In 2006 eight countries had the agency's top rating.

Read MoreS&P cuts France's outlook to negative

"We believe that as an unintended consequence of its OMT promise, the ECB may have instilled a sense of policy complacency," said Kraemer.

The European Central Bank promised in 2012 to buy the debt of stressed countries if needed under a program known as Outright Monetary Transactions or OMT. To date it has not activated the controversial program, but it has been credited with calming markets.

"We believe that one of the main impediments to a more robust recovery is the large overhang of debt. The recentslowdown should therefore not come unexpectedly," S&P added.

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