Economic growth is stagnating in Europe and cooling slightly in China, according to surveys of business activity released on Tuesday, fuelling concern about the risk of a global slump as Western governments struggle to cope with their debt problems.

Preliminary purchasing managers indexes (PMIs) in the 17-nation euro zone were marginally stronger than grim market forecasts, giving equities and the euro a modest boost.

But the surveys still suggested the euro zone's economy was likely to post near-zero growth in the current quarter through September. A separate index of economic sentiment in Germany, the ZEW, indicated the slowdown was spreading beyond indebted members of the bloc's periphery and taking root in core members such as Germany.

This could raise the risk of a recession in the euro zone during coming quarters. Combined with the slowdown in China, a European slump might help to push the United States back into recession.

There is a weakness in the core countries (of the euro zone), Germany in particular. The euro zone is losing its main motor of growth, said Chris Williamson at data provider Markit, which compiles the PMIs.

Analyst Martin van Vliet at financial group ING said: With little prospect of a near-term pick-up in external demand and the impact of the recent financial market turbulence yet to fully feed through into activity, we cannot be too complacent about the risk of a new euro zone recession.

However, for the time being, we stick to our base case that the economy will flatline rather than shrink in the second half of this year.

Markit's composite euro zone PMI for August, a broad measure of private sector activity which combines services and manufacturing data, was flat from the previous month at 51.1, beating market forecasts for a fall to 50.1.

The composite index is often used as a guide to economic growth and Markit said it was consistent with no quarterly growth in the current quarter. Analysts polled by Reuters earlier this month predicted euro zone growth of just 0.3 percent this quarter.

 

EUROPE FALTERS

The euro zone's services PMI edged down to 51.5 this month from 51.6 in July, hitting its lowest level since September 2009. The index, which measures firms ranging from restaurants to banks, has stayed above the 50 mark that divides growth from contraction for two years.

But some of August's growth was driven by firms fulfilling old orders. The backlog of work index fell to 48.8, its lowest since last October, from 49.6.

Meanwhile, the PMI for the euro zone's manufacturing sector slid to 49.7 -- its first sub-50 reading since September 2009 -- from 50.4. In a negative sign for the future, new export orders for manufacturers sank to 47.4 in August, the lowest since June 2009, from 49.2 in the previous month.

There is the dual whammy of the global cycle turning down and at the same time the domestic market being hit by concerns about the debt crisis and biting austerity measures in neighbouring countries, Williamson said.

Data from France showed its service sector unexpectedly picked up pace but factory activity declined for the first time in over two years. In Germany, Europe's largest economy, the manufacturing sector expanded faster than expected but growth in the service sector virtually ground to a halt.

Meanwhile, German analyst and investor sentiment fell much more than expected in August, figures from the Mannheim-based ZEW economic think tank showed.

Its headline economic sentiment index tumbled to -37.6, the lowest since December 2008, from -15.1 in July. It was the biggest one-month drop in five years.

The data released today support our view that the most likely scenario for the economic cycle going forward remains a growth pause until the end of the year. A recession is less likely, but risks stemming from a further fall in business and consumer confidence are considerable, said Christian Schulz, analyst at Berenberg Bank.

HSBC's Flash China Manufacturing PMI, designed to preview the country's factory output before official data is released, edged up to 49.8 in August from July's final reading of 49.3, but remained below the 50 mark.

Although the numbers indicated a slowdown of China's growth from the previous month, the Chinese economy is still expanding strongly on a year-on-year basis. HSBC said the August PMI was consistent with manufacturing growth of around 13 percent from a year earlier.

We maintain our forecast of a soft landing in growth for China, said Ting Lu, economist at Bank of America-Merrill Lynch.

He predicted China's economic growth would ease to around 9.0 percent in the second half of 2011 from 9.6 percent in the first half.