A global credit crunch knocked down Eurozone private sector growth to a two-year low in September as new orders plunged, a survey showed on Friday, making any further interest rate hike this year unlikely.
The figures provide clear evidence that turmoil which has seen stock and foreign exchange markets swinging wildly and the European Central Bank pumping temporary funds into money markets to alleviate soaring rates has affected the real economy.
The services sector took the hardest hit, with the RBS/NTC Economics flash services PMI down four points to 54.0 from 58.0, the worst tumble in the nine-year history of the index and the lowest level since August 2005.
That was much weaker than the 57.5 consensus forecast and triggered a reaction in December Bund futures, which pared earlier losses to trade as much as 16 ticks higher than where they were before the data.
"This is a very bad surprise ... the plunge in the services index is completely unexpected," said Aurelio Maccario at Unicredit MIB in Milan. "Clearly, the headline has been heavily affected by the financial markets crisis."
Euro zone manufacturing activity also was not immune from violent gyrations in markets that have seen interest rates chopped aggressively in the U.S. and triggered downward revisions to economic growth forecasts there and in Europe.
The RBS/NTC flash manufacturing PMI fell to 53.2 from 54.3 in August, its lowest point since November 2005 and also weaker than the 53.9 consensus forecast in a Reuters poll.
Both indexes remain well above the 50 mark that separates growth from contraction, but the dramatic falls will further support the view that the European Central Bank has likely put off any further interest rate hike well into the future.
"With deteriorating confidence and the ongoing rally, there is no room left for further tightening in 2007," said Maccario.
The flash composite PMI, which measures manufacturing and services together, tumbled to a two-year low of 54.5 in September from 57.4 in August.
NTC said the data were collected Sept. 12-20 and around 15% of total flash responses came in after the U.S. Federal Reserve cut rates on Tuesday, adding it was tough to gauge how broad-based the deterioration really was.
"The four point drop is probably by and large due to the financial services uncertainty," said Rainer Guntermann at Dresdner Kleinwort, who said a slowdown in the manufacturing sector in previous months had finally caught up with the services sector.
He added that further downgrades to economic growth in 2008 would be seen in coming weeks.
But while activity slowed sharply, the rate of growth in prices charged came off by less. The service sector prices charged index eased to 53.2 from 53.6, the lowest since February.
While business confidence fell sharply to a 4-1/2-year low in August when the crisis began, it appeared to have stabilized in September. The confidence index edged up to 60.3 from 60.2 the month before.
But that one hit appears to have been enough to diminish business risk-taking. New orders growth in the service sector sunk dramatically to its lowest level since November 2005, hitting 53.7, down from 58.5 in August.
New orders also slipped in the manufacturing sector, hitting their lowest since August 2005 at 52.4 from 54.8 last month.
But employment managed to remain robust across both sectors, which NTC said supported the view that businesses believe the credit crisis may be a short-lived phenomenon. The employment index marginally rose to 52.6 from 52.5 in manufacturing.