The euro zone is in its worst downturn since the early days of 2009, at least if the latest business surveys are anything to go by - something many forecasters seem to have missed.
The surveys, which have a good record of tracking economic growth, particularly purchasing managers' indexes (PMIs), point to a steep economic decline in the third quarter and show no sign of improvement even now.
But the consensus among economists in a Reuters poll last week suggests that euro zone growth contracted just 0.2 percent in Q3, the same rate at which it shrank in the previous quarter.
The festering sovereign debt crisis and fiscal austerity prescribed to cure it had already mired Italy and Spain in recession. According to the latest PMIs, Europe's two biggest economies - Germany and France - are now foundering too.
From July to September, the PMIs were consistent with the euro zone economy shrinking by around half a percentage point, according to compiler Markit.
That's as steep a decline as any of 40 economists polled by Reuters predicted. The lowest forecast was for a 0.5 percent contraction, a view held by only two respondents.
One of them, James Shugg, senior economist at Westpac Securities, compared the current level of the PMIs to a little over four years ago, in the months before the global financial crisis reached its nadir.
"The PMIs have now been around these levels for quite a while, but we haven't had GDP readings as weak as we were getting back in 2008," said Shugg, adding he was comfortable at the most pessimistic end of the forecast range.
Indeed, the most extreme divide between business surveys and the consensus of economists happened in late 2008. A Reuters poll then forecast the euro zone economy would shrink by 0.2 percent in the third quarter, whereas the actual figure turned out to be minus 0.6 percent.
And even though the Lehman Brothers had already collapsed and sentiment was cratering, most analysts believed the following quarter would be only slightly worse, pencilling in a 0.3 percent decline. Output actually nosedived 1.7 percent.
Graphic of euro zone GDP vs PMIs: http://link.reuters.com/rud84s
This year, it's not just the PMIs that point to poor official data, Shugg said.
"It's the same with all the other readings. You look at the Ifo, ZEW, the EU Commission's economic confidence indicator, the business climate index ... They're all pointing to a weaker outcome, certainly than we had in the fourth quarter of last year."
The euro zone economy shrank 0.3 percent in the final months of 2011, when PMI readings were higher than they are now.
A review by Reuters of economic forecasts since the Great Recession of 2008-2009 shows analysts have consistently been over-optimistic about the major Western economies.
Forecasts in April and May 2011, for example, erred on the upside for 20 out of 27 monthly economic indicators polled.
On Wednesday, Eurostat reported euro area factory output figures for September that point to the steepest downturn since January 2009. Since then, some of the more bullish economists have been quietly revising down their predictions for Thursday's third-quarter GDP release.
They include Barclays, which last week noted the potential for an upside surprise from the Q3 GDP reading, showing growth instead of its forecast for no change, citing strong industrial data earlier in the quarter that stood in contrast to the PMIs.
Following Wednesday's grim Eurostat figures, Barclays now says it expects a 0.2 percent decline in third-quarter GDP.
Poor early data could also mean the fourth quarter disappoints.
"All employment indicators are still in negative territory, suggesting that the bleeding on the labour market isn't over yet," said ING economist Peter Vanden Houte in a research note. "We now expect GDP growth to remain negative until Q2 2013."
Westpac's James Shugg said little heed should be paid to headlines about the euro zone either re-entering or skirting recession when Thursday's data come out.
"People seem to think the euro zone has skirted recession, because there hasn't been consecutive quarters of decline," he said, a reference to the technical definition of a recession as two quarters of contraction in a row. "But in actual fact there has been three."
The GDP figures show a tiny decline in the first quarter of this year - 0.04 percent - which is rounded up to zero in the one-decimal-place figure that is widely reported.
"When you look at the raw data, you can see the euro zone's been in recession for a year, but this (the fourth quarter) is looking like it's been the steepest quarter yet of decline," Shugg said.
Copyright @ Thomson Reuters 2012