By Jonathan Cable
LONDON (Reuters) - The euro zone's economic downturn has deepened this month - even before Cyprus's bailout debacle - creating another headache for policymakers battling to revive the bloc's fortunes, a business survey showed on Thursday.
Most survey responses were received before news broke of Cyprus's bailout deal including an unprecedented levy on all bank deposits. Survey compiler Markit, who released the preliminary data and will issue final responses at the start of April, said the picture could be even worse by then.
"Events that hit business confidence can have a very rapid effect on the data and so there is good reason to believe that responses we collect this week will on average be more negative," said Chris Williamson, Markit's chief economist.
"It's really quite disappointing. Given the deterioration in the political and financial market outlook there is really little hope from what we see that there is going to be a turnaround in the second quarter, and in fact more likely an increased weakening."
Cyprus has pushed the 17-nation currency bloc into fresh turmoil, with its parliament voting overwhelmingly on Tuesday to reject the terms of the bailout deal, raising the risk of default and a bank crash.
The Flash Eurozone Composite Purchasing Managers' Index, which makes up around 85 percent of the final reading and is seen as a reliable economic growth indicator for the bloc, fell to 46.5 in March from February's 47.9.
That was lower than all forecasts in a Reuters poll of 23 economists and far short of median expectations for a small rise to 48.2. The index has been below the 50 mark that separates growth from contraction for all but one of the past 19 months.
Having already contracted since the second quarter of last year, Markit said the latest PMI data suggested the euro zone economy would shrink 0.3 percent in the current quarter.
That is worse than the 0.1 percent contraction predicted in a Reuters poll taken last week that also forecast negligible growth next quarter - and only then because of German strength.
Markit's surveys suggested Germany is also now showing signs of fatigue and again highlighted a chasm between the state of the euro zone's two biggest economies.
Germany's composite PMI fell in March, although it held above the 50 line for the fourth month, suggesting some strength in Europe's largest economy. But in France, the bloc's second-biggest economy, it sank to a four-year low.
"We are worried that Germany's growth rate has come down because Germany was acting as a real spur to hopes that the whole region could stabilise, but the fact that its index has fallen so sharply is a concern," said Williamson.
Despite the continued recession, the European Central Bank will keep its main refinancing rate on hold at a record low of 0.75 percent for the foreseeable future, the Reuters poll suggested, although a sizeable minority of poll respondents had pencilled in a cut to rates.
NEW BUSINESS DRIES UP
A PMI covering manufacturers, who were the main driving force behind the bloc's recovery from the last recession, fell to 46.6 from February's 47.9, confounding expectations for a rise to 48.2.
Similarly a PMI covering services firms - which make up the bulk of the euro zone economy - fell to a five-month low of 46.5 from 47.9, again against median forecasts for a rise to 48.2.
Incoming new business for services firms dropped at the fastest pace since October, with a sub-index falling to 45.2 from 46.3 - suggesting next month's PMI will also be weak.
In another worrying sign, some of the factory activity was generated by running down order books, according to the backlogs of work index, which sank to 46.2 from February's 48.0 - its biggest one-month drop since June.
Signalling their lack of confidence in the future, firms across the euro zone cut their workforces for the 15th straight month, albeit at a slower pace than in February, with the sub-index rising to 48.0 from 46.8.
That marked the 15th month below break-even and follows official data earlier in March that showed euro zone unemployment was already at a record high of 11.9 percent in January.
"The only bright spots are in the backwards looking indicators, like employment, holding up a bit better than expected. But the worry is these surveys were collected before the bad news on Cyprus really hit, so you have to wonder what impact that will have on business sentiment," Williamson said.
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(Editing by Hugh Lawson)