'Miserable' Euro PMI Heightens Recession Risk: Economists

Fears of a recession increased in Europe on Monday, following worse-than-expected composite PMI data in the euro zone, with big declines seen in both manufacturing and services.

Famous economist Nouriel Roubini wrote on Twitter after the data came out that euro zone politicians were "hell-bent to commit growth harakiri" as "financial engineering without growth soon will lead to defaults and euro zone break-up."

Travelpix Ltd | Photographer's Choice | Getty Images

The Flash Markit Eurozone Services Purchasing Managers' Index (PMI) - measuring business activity at thousands of firms from banks to restaurants -  fell to 47.2 this month from 48.8 in September, well below a consensus of 48.5 from economists surveyed by Reuters.

The euro zone's manufacturing PMI fell to 47.3 in October, its lowest level since July 2009, with German manufacturing falling for the first time in two years because of a combination of drops in output and new orders and backlogs of work.

The fall in euro zone PMI "reflected steep declines in both the manufacturing and services indices, suggesting that the deterioration in growth prospects reflects developments both at home and abroad," Ben May, European economist at Capital Economist, wrote in a market note.

"On past form, the headline index is now consistent with a quarterly contraction in GDP of around one percent," May added.

There is still a chance that third-quarter gross domestic product shows a "small positive figure" but "negative growth now seems hard to escape in the fourth quarter," ING economist Peter Vanden Houte wrote in a market report.

Spillover Into 2012

This will likely spill over into 2012 and ING has slashed its growth estimates to only 0.5 percent for next year.

"All in all this is a miserable report, highlighting the fact that the euro zone is falling into recession again. The snail-like progress in the resolution of the European debt crisis is unlikely to alter this picture soon," Vanden Houte wrote.

On Sunday, a summit of European Union leaders made some progress in discussions regarding sorting out the euro zone's debt crisis but left any agreement for Wednesday.

Leaders in the euro zone want to boost the firepower of the area's rescue fund, the European Financial Stability Facility (EFSF) but have not yet agreed on the best way to do so.

Vanden Houte said that the "snail-like" progress of the talks was unlikely to alter the gloomy outlook for the economy.

"Fortunately, because of declining activity, inflationary pressures seem to have peaked," he added. "This should open the door for a 50 [basis points] ECB rate cut in the first quarter of next year on the back of more downbeat growth and inflation ECB staff forecasts in December."