By Jonathan Cable

LONDON (Reuters) -Euro zone business activity took a surprisingly sharp turn for the worse this month as the bloc’s dominant services industry contracted and manufacturing sank deeper into recession, a survey showed on Friday.

HCOB’s preliminary composite euro zone Purchasing Managers’ Index, compiled by S&P Global, sank to a 10-month low of 48.1 in November, below the 50 mark separating growth from contraction.

A Reuters poll had predicted no change from October’s 50.0.

“The November PMI is another wake-up call for euro zone policymakers that the economy continues to show signs of weakness,” said Bert Colijn at ING.

“New business is weakening again for both manufacturing and services with export orders in particular being down sharply as the euro zone economy battles weak demand from abroad.”

The data pushed euro zone government bond yields lower and knocked the euro to its lowest against the dollar since December 2022 as investors bet on faster rate cuts from the European Central Bank.

The central bank has cut rates three times this year to 3.25% amid increasing concerns about the bloc’s lacklustre growth outlook.

Money markets expect another quarter-point cut next month and a further 125 basis points of cuts next year that would take the main rate to 1.75% by end 2025.

A composite new business index fell to 46.6 from 47.9, its lowest reading this year, suggesting no imminent improvement.

The economic downturn accelerated in both Germany and France with business activity falling at the quickest rate since early this year, the survey showed.

Political uncertainty in the bloc’s two biggest economies may be partly to blame.

Germany’s three-way coalition collapsed earlier this month, leaving the country in political limbo until snap elections in February, while in France a far-right party is threatening to topple Prime Minister Michel Barnier’s fragile coalition government over a dispute about the 2025 budget.

BROAD MALAISE

Germany’s economy grew less than previously estimated in the third quarter, the statistics office reported on Friday, in further bad news for a country set to be the worst performer among the Group of Seven rich democracies this year.

Adding to the gloomy outlook, German industry expects a 3% fall in production in 2024, a third year of decline, with no recovery in sight for 2025, the country’s BDI industry body said on Friday.

To boot, President-elect Donald Trump’s proposed trade tariffs will have a significant effect on the euro zone economy in the coming years, according to a strong majority of economists in a Reuters poll.

A PMI index of euro zone services, which had been offsetting the decline among manufacturers, fell to a 10-month low of 49.2 from 51.6. The poll forecast was for no change.

Firms did increase headcount again but were less optimistic about the year ahead. The business expectations index fell to a two-year low of 55.0 from 59.9.

The manufacturing PMI index fell to 45.2 from 46.0, confounding expectations for no change.

An index measuring output, which feeds into the composite PMI, dropped to 45.1 from 45.8. That was despite factories cutting their charges for a third month and at a steeper pace than in October. The output prices index dropped to 47.9 from 48.2.

In Britain, outside the European Union, business output shrank for the first time in more than a year and tax increases in the new government’s first budget hit hiring and investment plans, its PMI showed, a fresh setback for Prime Minister Keir Starmer’s push for economic growth.

British retail sales fell much more than expected in October, according to official data on Friday that added to signs of a loss of momentum in the economy.

(Reporting by Jonathan CableEditing by Christina Fincher)

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