Private sector business activity in Europe and China declined sharply this month as the eurozone debt crisis and a stalling U.S. recovery hit confidence, stoking fears that the global economy could sink back into recession.
The eurozone's dominant service sector registered a shock contraction in September, its first in two years, while its manufacturing sector, which drove most of the bloc's recovery, shrank for the second month running, surveys showed on Thursday.
Earlier data from China showed once-booming manufacturing contracted for a third consecutive month, suggesting the world's number two economy may not be able to provide much of a counterweight to the West.
"There is a global slowdown ... the Fed acted yesterday, the Bank of England talked about the potential to do more quantitative easing. There is no doubt the risks of a global recession have grown," said Jeavon Lolay, head of global research at Lloyds Banking Group.
The U.S. Federal Reserve warned of significant risks to the already weak economy and launched a new plan to lower long-term borrowing costs on Wednesday, just hours after the BoE signaled it was ready to pump in more money.
The Flash Markit Eurozone Services Purchasing Managers' Index (PMI), which measures business activity at thousands of firms from banks to restaurants, sank to 49.1 this month from August's 51.5, far below a consensus forecast of 51.0.
None of the 37 economists polled by Reuters had predicted that services activity would contract and this is the first time the index has been below the 50 mark that divides growth from contraction since August 2009.
It was a similar picture in the manufacturing sector, which had driven a large part of the bloc's recovery. The factory index dropped to its lowest level in two years at 48.4, slightly below expectations of a fall to 48.5.
"The numbers are still consistent with some GDP growth, so it does not signal recession just yet," said Martin Enlund at Handelsbanken.
"That said, we are seeing a slow-motion train crash in the euro area, where credit contraction risks leading to a new recession by Christmas unless governments face up to the task swiftly and forcefully."
Eurozone leaders have come under fire for not acting fast enough in the fight to contain the debt crisis.
The International Monetary Fund warned on Tuesday that Europe and the United States could slip back into recession next year without bold action and forward-looking data suggested the situation was unlikely to improve anytime soon.
The new business index for the service sector fell to 48.3 from 51.4 in August, the first contraction in over two years. The backlogs of work index meanwhile showed that for a third consecutive month some activity was driven by firms running down old orders.
Economists and Chinese officials have widely predicted China's growth will slow, largely because of waning exports. The country, known as the factory to the world, is especially vulnerable to fading demand from the United States and Europe, its two biggest export markets.
HSBC's China Flash PMI dipped to 49.4 from August's final figure of 49.9.
In the face of rising inflationary pressures the central bank has tightened policy but many economists say it will pause its year-long campaign to see how the global turmoil plays out.
"You're between a rock and a hard place here," Jim Walker, founder of Asianomics, said in a Reuters Insider interview. "If you try to control the inflation, the growth gets worse. If you try to increase the growth, the inflation gets worse."
China's central bank has raised interest rates five times and lifted banks' reserve requirements nine times since October. The consumer price index remains well above China's 4 percent target.
The European Central Bank was the first of the "big four" central banks, a club that also includes the U.S. Federal Reserve, the Bank of England and the Bank of Japan, to raise interest rates since the global financial crisis.
It has lifted rates by 25 basis points twice this year but most economists do not see any further hikes until 2013 at the earliest, and some are now calling for a cut.
The ECB tightened policy to control inflation that was running well above its 2.0 percent target ceiling. But the PMI figures suggest price rises are already coming under control.
The composite index for prices charged by companies fell to 49.8, its lowest since July 2010, while input price rises slowed.
"There was a huge easing in price pressures, particularly in manufacturing. It should give some comfort to policymakers thinking about perhaps reversing some of those rate hikes we saw earlier this year," Chris Williamson at Markit said.
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