Europe is facing stagnation as its growth engine stalls

Financial information firm Markit's latest worrying snapshot of flagging growth in the eurozone showed activity stuck at 22-month lows during the month and the manufacturing sector shrinking for the first time since 2009.

It also revealed confidence among the region's services firms falling at the fastest pace since the height of the financial crisis in October 2008 as sentiment was rocked by Europe's sovereign debt crisis and biting austerity measures.

The figures raise the prospect of even weaker growth among the 17 nations using the eurozone after last week's sluggish 0.2% advance between April and June. The two largest economies, France and Germany, slowed to a virtual standstill and the rest of Europe saw falling output for the third month in a row, Markit added.

Chief economist Chris Williamson said: "Growth in the third quarter could be even slower than the disappointing 0.2% rise seen in the three months to June. Most worrying is the near-stagnation of Germany, which suggests that the region's main engine of growth has stalled."

There was slightly better news at home as the CBI's latest industrial survey showed manufacturing orders holding up, but the British Bankers' Association warned lending conditions were "very subdued" in July with businesses reluctant to invest and looking to pay down debt. Markit's figures also showed new orders among manufacturers and services firms in the eurozone falling for the first time in a year, as well as flagging job creation.

ING Bank economist Martin van Vliet 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 eurozone recession."

The mounting evidence of stagnation will put more pressure on the European Central Bank to reverse its two interest rate rises this year to tackle high inflation. A leading German trade association cut its growth forecasts to 2% in 2011 and just 1% in 2012, and the ZEW institute added today that confidence among German investors also fell sharply in August.

In Spain, which came under attack from bond markets this month, politicians were recalled to debate a €5 billion (£4.4 billion) round of spending cuts to tackle the deficit. But it borrowed almost €3 billion at much lower rates than last month, helped by the ECB's move into troubled markets to buy up debt.