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Euro economy heading for steep contraction - PMIs

The escalating sovereign debt crisis has already pushed the euro zone economy into a contraction that could be far worse than economists had expected, business surveys suggested on Monday.

Markit's Eurozone Composite Purchasing Managers Index, which measures changes in business activity across the euro zone, showed the euro zone's private sector economy contracting for the third month in a row in November.

While rising slightly to 47.0 from 46.5 in October, the PMI was still far below the 50 mark that divides growth from contraction and the latest figure was trimmed from a preliminary reading of 47.2 Survey compiler Markit said November's composite PMI put the euro zone on course for a 0.6 per cent economic contraction in the fourth quarter – worse than any forecast from more than 30 economists polled by Reuters last month.

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The latest data comes at the start of a week that could prove crucial in resolving a debt crisis that threatens to tear apart Europe's common currency bloc, something that could have catastrophic implications for the global economy.

"The major euro zone countries are all now contracting and face the risk of recession," said Chris Williamson, chief economist at Markit.

The latest Reuters poll of economists showed a 60 per cent chance the euro zone would fall into recession.

"Italy is faring the worst, with the survey suggesting that GDP could collapse by 1 per cent in the fourth quarter, while both France and Spain are likely to see their economies contract by around 0.5 per cent."

Mr. Williamson said Germany – the euro zone's biggest economy and the key stakeholder of any debt crisis cure – was suffering only a mild downturn at the moment, but added that a steep drop in new orders reported by factories last month signalled worse to come.

The labour market in the euro zone continued to stagnate in November, the survey showed, with the composite PMI employment index staying put at 50.1.

Figures last Wednesday showed the euro zone jobless rate rose slightly to 10.3 per cent in October from 10.2 per cent in September, although that figure says little about the dismal labour market in the bloc's periphery, with endemic youth unemployment.

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The PMI for the services industries, which comprise the bulk of the euro area economy, ticked up to 47.5 in November from 46.4 the previous month, although the latest figure was revised down from a preliminary reading of 47.8.

"Service providers remained worried about the impact of the escalating debt crisis and the darkening economic outlook," said Markit's Mr. Williamson.

"Particularly steep downturns are occurring in Spain and Italy, while the French and German services economies are more or less stagnating."

The survey suggested that services firms are eating increasingly into backlogs of work to keep active, with the index measuring this sliding to 46.1 from 46.3 in October, the weakest reading since September 2009.

"Backlogs of orders fell at the fastest rate for over two years, which suggests that activity is likely to continue to decline in coming months," said Mr. Williamson.

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