Jan. 23 (Bloomberg) -- Europe’s manufacturing and service industries contracted for an eighth month in January as the global recession curbed demand for exports and damped spending.

A composite index of both industries was at 38.5 compared with 38.2 in December, which was the lowest reading since the survey began in 1998. Economists forecast a decline to 37.4, according to the median of 15 estimates in a Bloomberg survey. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction.

The 16-nation euro region is suffering the deepest recession since World War II as the credit shortage derails purchases of homes, cars and factory machinery. Gross domestic product will drop 1.9 percent this year after growth of 0.9 percent last year, the European Commission forecasts.

While the rise in the purchasing managers’ index “provides a glimmer of hope that the rate of economic contraction may have peaked at the end of last year,” its level is “still consistent with a sharp drop in GDP,” said Chris Williamson, chief economist at Markit.

A gauge of manufacturing activity was at 34.5 after reaching a record low of 33.9 in December. The services index rose to 42.5 from 42.1.

‘Contraction Territory’

“Activity is still well into contraction territory, particularly in manufacturing, and it is important not to read too much into the surveys and assume that the downturn is bottoming out,” said Howard Archer, chief European economist at IHS Global Insight in London.

Fiat SpA, Italy’s biggest manufacturer, yesterday cut its earnings forecast and said it won’t pay a dividend after fourth- quarter profit plunged. Volkswagen AG and Bayerische Motoren Werke AG are reducing hours for a total of 86,000 workers to rein in production as demand for vehicles wanes.

Deutsche Bank AG, Germany’s biggest bank, this month reported a record loss of about 4.8 billion euros ($6.3 billion) for the fourth quarter after the financial crisis pummeled stock and bond trading.

“Not only was the fourth quarter a disaster, the first quarter of this year does not look a lot better,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. The European Central Bank will deliver “another rate cut in March,” he said.

The ECB has cut its key interest rate by a total of 225 basis points since early October to 2 percent, matching a record low.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net

Last Updated: January 23, 2009 05:58 EST