Euro zone business growth fell last month to its weakest since the beginning of 2015, according to surveys providing the latest evidence the bloc`s economy is losing momentum.
Businesses have reined in spending amid growing caution about the economic outlook and political uncertainty as Britain gears up to start divorce proceedings from the European Union and Germany and France face elections.
What growth existed last month was once again lopsided, which may concern policymakers, with only France showing signs of its upturn gaining momentum while growth trended lower in Germany, Italy and Spain.
"Anecdotal evidence suggests that economic and political uncertainty is weighing on euro area confidence, and we expect sentiment to be further dampened in the coming month as Brexit negotiations kick in," noted Apolline Menut at Barclays.
"Increasing uncertainty and falling confidence underpin our forecast of deteriorating growth in Q4 2016 and Q1 2017."
Markit`s final composite Purchasing Managers` Index for the euro zone was 52.6 in September, matching a flash estimate but below August`s 52.9 and marking a low since January 2015.
It has been above the 50 mark that divides growth from contraction since mid-2013.
The PMI points to third quarter economic growth of 0.3 percent, Markit said, in line with a prediction from a Reuters poll last month which highlighted the need for fiscal stimulus rather than more aggressive monetary policy easing. [ECILT/EU]
Despite years of ultra-loose monetary policy the European Central Bank has so far failed to get inflation anywhere close to its near 2 percent target. Policymakers may take some cheer from data in the survey indicating firms held prices steady last month instead of cutting them.
The output price index, which has held stubbornly below the 50 mark for most of the past five years, came in on the dividing line for the first time since September 2015.
Inflation in the 19 countries sharing the euro doubled to 0.4 percent in September from 0.2 percent in August, the EU`s statistics agency Eurostat said on Friday.
Retail sales across the bloc dipped 0.1 percent in August after a rise in July was revised down to much weaker than initially estimated, official data showed on Wednesday.
It was a possible sign that Britain`s vote to leave the EU may be having a greater impact on the euro zone than previously thought.
Markets largely ignored the data.
FRANCE OUT FRONT
Of the biggest four economies in the bloc only France showed improvement, where services activity expanded in September at the fastest pace in 15 months as demand improved, although business was not as brisk as initially thought.
In Germany, near-stagnation in services put the brakes on overall private sector growth, highlighting the risk of a slowdown in Europe`s biggest economy in the second half of the year.
Services PMIs for both Spain and Italy also slipped.
That meant overall growth in the bloc`s dominant service industry dwindled. The PMI fell to 52.2 from 52.8, just above the flash 52.1 reading but its lowest level since late 2014.
In contrast, manufacturing activity in the euro zone picked up last month as demand increased from both within and outside the currency bloc, a sister survey showed on Monday, driving factories to increase headcount.
However, with growth rates falling, services firms took on fewer new workers than they did in August. The employment sub-index fell to a five-month low of 52.0 from 52.4.
Unemployment held steady in August at 10.1 percent, the joint lowest level since 2011.