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Euro zone economy losing steam as PMIs disappoint

Thursday, 21 Nov 2013 | 3:25 AM ET
Sean Gallup | Getty Images News | Getty Images

Business activity in the euro zone fell unexpectedly in November, prompting concerns that the 17-nation bloc's economic recovery is losing steam.

The flash composite euro zone purchasing manager's index (PMI) fell to 51.5 in November, down from 51.9 in October, data from economic analysts Markit showed on Tuesday. Analysts polled by Reuters had expected a figure of 52.0.

While still above the 50-point mark that separates expansion from contraction, analysts worry the index is slipping in the wrong direction, particularly as it follows worse-than-expected third-quarter growth in the euro zone.

After the longest contraction in continental Europe in over 40 years, the region had pulled out of an 18-month stretch of negative growth in the second quarter of 2013.

(Read more: Is the eurozone already running out of good news?)

In the third quarter of 2013, however, the annual GDP of the euro zone grew by just 0.1 percent, marking a slowdown from an expansion of 0.3 percent in the second quarter, according to data from Europe's statistics agency Eurostat.

The jobless rate, meanwhile, remained at a record 12.2 percent in September.

The European Central Bank is concerned about slowing growth in the region and cut rates to a new low of 0.25 percent last time it met in an attempt to stimulate the economy and counteract concerns over deflation.

However, lending activity by banks remains subdued – analysts say this is a combination of lenders wanting to shore up their capital reserves against further economic shocks and a reluctance to borrow by families and companies.

In a further sign that the central bank could be considering a further move to encourage bank lending in the region, a report from Bloomberg News on Wednesday cited two unnamed sources as saying the central bank was considering lowering its deposit rate, one of its two main lending rates, to below zero.

(Read more: Why euro zone slowdown should worry the world)

Michael Hewson, senior markets analyst at CMC Markets, said the report suggested that the ECB was "extremely concerned" about the region's slowdown, but he was not convinced a negative deposit rate would be supported by prominent euro zone countries, like Germany.

"This speculation coming so soon after this month's rate cut would appear to suggest that policymakers remain extremely concerned about the lack of growth, particularly in France after last week's slip back into contraction in the third quarter," Hewson told CNBC in a note on Thursday.

"Such a move would be fiercely resisted by Germany and Bundesbank chief Jens Weidmann, judging by his comments yesterday [Weidmann dismissed the ECB pursuing a quantitative easing program], and given the fragility of the European banking system such a move could actually cause more problems than they would solve."

Earlier on Thursday, data showed that Germany's services and manufacturing sectors expanded more than expected in November, while activity in France disappointed.

The German flash composite purchasing manager's index (PMI) rose to 54.3 in November, above October's final reading of 53.2. Both manufacturing and the services sector performed better than expected and saw an improvement compared to October.

While business activity expanded in the euro zone's largest economy, the euro zone's second largest economy, France, fared less well.

French business activity contracted in November, with activity weaker than expected in both the manufacturing and the services sector. Manufacturing activity even slipped to a six-month low of 47.8 in November, while the services sector dropped to a four-month low of 48.8.

Chris Williamson, chief economist from Markit said there "is a concern that [France is] slipping in the wrong direction….The danger is you're going to get headlines signaling a renewed recession and that's going to damage business confidence further."

The data will also cement fears that France's economy is slowing down further, after third quarter growth data showed an unexpected contraction of 0.1 percent. France recorded growth of 0.5 percent in the second quarter.

Toby Nangle, head of Multi-Asset Allocation at Threadneedle Investments, told CNBC that the numbers were "extremely disappointing" while David Bloom, global head of foreign exchange strategy at HSBC, said France was now the euro zone's "worry."

"We've moved on from worrying about the peripheral countries and now people are much more concerned about one of the cores, and that is the French economy, from a number of perspectives," Bloom told CNBC Europe's "Squawk Box".

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Follow us on Twitter: @CNBCWorld

Contact Europe: Economy

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