FRANKFURT, Germany — A key indicator of business sentiment in Europe unexpectedly fell deeper into recession territory Thursday, compounding concerns about the global recovery after signs of slowing manufacturing in China.
Major stock indexes in Europe slipped and the euro fell against the dollar after a survey of purchasing managers suggested that growth in the eurozone shrank during the first three months of the year. That would be the second negative quarter in a row, meeting the definition of a recession.
The data suggest that the 17-nation euro area is still struggling, even after a flood of cash from the European Central Bank helped assuage anxiety about a major banking crisis and credit crunch.
“The easing of the sovereign debt crisis has apparently failed to bring about a lasting improvement in business sentiment,” said Christoph Weil, an economist at Commerzbank, in a note to clients.
In China, weak external and domestic demand continued to weigh on the manufacturing sector in March, a survey released Thursday showed, raising expectations that the Chinese authorities would step up measures to revive economic momentum.
The survey of purchasing managers in the vast Chinese factory sector, released by HSBC, showed that activity had shrunk in March, for the fifth month in a row, as the Chinese economy felt the pain of feeble global economic activity.
China has become a major market for European products ranging from heavy machinery to luxury goods, so a slowdown there adds to problems in Europe.
The preliminary reading in the China survey for March dropped to 48.1, from 49.6 in February, HSBC said. Readings below 50 signal contraction, and even though the reading provides only an early insight into this sector of the Chinese economy, the drop came as a disappointment.
The Australian dollar, which is highly sensitive to signs of weakness in China, dropped after the data release. Oil and metal prices also slipped.
In Europe, the purchasing managers survey compiled by Markit Economics slipped to a three-month low of 48.7 in March, down from 49.3 in February. In the Markit survey, a reading of less than 50 also indicates a decline in economic activity.
The Markit survey also pointed to a contraction in manufacturing in Germany. That is particularly worrying for Europe, because German exports have been helping to compensate for sluggishness in southern Europe as countries like Italy and Spain cut government spending to reduce debt.
A separate report underscored the slowdown. Manufacturing orders in the eurozone fell 2.3 percent in January from December, said Eurostat, the European Union’s statistics office. That was slightly more than a 2.1 percent decline forecast by analysts in a Reuters’ poll.
“Any hope that the manufacturing cycle is turning rapidly in the euro area is dashed by today’s numbers,” said Stella Wang, an analyst at Nomura in London, in a note. However, she said the data are unlikely to prompt the European Central Bank to cuts its benchmark interest rate from 1 percent because inflation remains above the official target of about 2 percent.
There are strong links between the Chinese and eurozone economies, because many German export products such as cars and heavy machinery are sold there. China has become the largest market for Volkswagen and other companies.
“With new export orders sluggish and domestic demand still softening, China’s slowdown has yet to finish,” said Xiaoping Ma and Qu Hongbin, China economists at HSBC, in a research note.
The upside is that China has a fair amount of firepower it can deploy to stimulate growth. Analysts widely expect the authorities to employ a wide range of these tools as the year progresses.
The central bank has recently eased constraints on banks’ ability to lend by lowering the reserve requirement ratio for lenders.
By reducing the amount that banks need to set aside, these steps have effectively injected more loans into the economy.
On Wednesday, in a similar though more limited action apparently aimed at encouraging more lending in rural areas, the central bank lowered the reserve ratio for some branches of Agricultural Bank of China, one of the country’s largest lenders, according to a statement on the central bank’s website.
Analysts believe the central bank will make several more such cuts during the year. Other measures could include modest interest rate decreases and focused tax reductions.
“The drop is quite large, especially given that March tends to bring an improvement,” Dariusz Kowalczyk, a strategist at Credit Agricole in Hong Kong, wrote in a research note about the purchasing managers’ index.
Although the reading is likely to reinforce fears of a hard landing in China, Kowalczyk stressed that the slowdown in manufacturing activity was expected to be only temporary and that he continued to believe China would see a soft landing, with overall growth this year of 8 percent.
Business, Pages 29 on 03/23/2012