By Jonathan Cable
LONDON (Reuters) - Businesses across the euro zone performed much worse than expected this month as factory activity contracted at the fastest pace in nearly six years, hurt by a big drop in demand, a survey showed on Friday.
While a downturn in manufacturing was partly offset by stable - yet relatively weak - growth in the euro zone's dominant services industry, the surveys suggested the bloc's economy had a poor first quarter.
That supports the European Central Bank's change of tack earlier this month. It pushed out the timing of its next post-rate increase until 2020 at the earliest and said it would offer banks a new round of cheap loans to help revive the economy.
IHS Markit's Flash Composite Purchasing Managers' Index, which is considered a good guide to economic health, dropped to 51.3 this month from a final February reading of 51.9, missing a Reuters poll median expectation for 52.0.
"Manufacturing is clearly the main area of weakness and concern at the moment. The manufacturing downturn is gaining momentum and will act as an increasing drag on the economy in the second quarter," said Chris Williamson, chief business economist at IHS Markit.
"To what extent can the services sector come to the rescue? It certainly helped prop up the economy in the first quarter but is in one of its slowest growth spells since 2016. Forward looking indicators aren't looking particularly encouraging."
Williamson said the PMIs pointed to first-quarter GDP growth of 0.2 percent, below the 0.3 percent predicted in a Reuters poll last week. [ECILT/EU]
The flash manufacturing PMI sank to 47.6 from February's 49.3, its lowest reading since April 2013 and well below the 50 mark that separates growth from contraction.
A Reuters poll had predicted a modest rise to 49.5 and even the most pessimistic economist surveyed had predicted a reading of 48.4.
An index measuring output, which feeds into the composite PMI, plummeted to a near six-year low of 47.7 from 49.4.
Highlighting the struggles faced by factories, the new orders index dropped to 44.5 from 46.3, a level not seen since the end of 2012. Casting more shadows on the outlook, companies ran down old orders and raw materials and built up stocks of completed goods.
Growth in the services industry slowed in line with a Reuters poll. Its PMI dipped to 52.7 from 52.8.
And some of that activity came from completing old work. The backlogs of work index fell to 49.0 from 51.0, only the second time it has been sub-50 in almost three years.
Adding to the melancholy picture, services slowed their hiring.
So with forward-looking indicators turning increasingly downbeat, optimism about the year ahead waned. The composite future output index dropped to 59.9 from 60.6.