Euro zone factories faltering as core crumbles

LONDON Mon Sep 3, 2012 4:50am EDT

An employee of German car manufacturer Mercedes Benz works on a Mercedes B-class car at the Mercedes plant in Rastatt July 16, 2012. REUTERS/Alex Domanski

An employee of German car manufacturer Mercedes Benz works on a Mercedes B-class car at the Mercedes plant in Rastatt July 16, 2012.

Credit: Reuters/Alex Domanski

LONDON (Reuters) - The euro zone manufacturing sector contracted faster than previously thought last month, despite factories cutting prices, as core countries failed to provide any support, a survey showed on Monday.

The downturn that began in the smaller periphery members of the 17-nation bloc is now sweeping through Germany and France and the situation remained dire in the region's third and fourth biggest economies of Italy and Spain.

"Larger nations like France and Germany remain in reverse gear... the (manufacturing) sector is on course to act as a drag on gross domestic product in the third quarter," said Rob Dobson, senior economist at data collator Markit.

Markit's final Purchasing Managers' Index (PMI) for the manufacturing sector fell from an earlier flash reading of 45.3 to 45.1, above July's three-year low of 44.0, but notching its 13th month below the 50 mark separating growth from contraction.

"The rate of decline was a little slower than in July, providing some heart that the manufacturing downturn may be easing, but the sector is on course to act as a drag on gross domestic product in the third quarter," Dobson said.

Having contracted 0.2 percent in the three months to June the bloc's economy is seen posting similar results in the current quarter, with no growth expected until the start of next year.

In its battle to support an economy ravaged by a two-and-a-half-year-old debt crisis, the European Central Bank is now widely seen cutting interest rates to a new record low of 0.5 percent - either on Thursday or next month. <ECB/INT>

Inflation jumped more than expected in August, data showed on Friday, a factor that may discourage the ECB from acting this week, but the PMI survey showed factories had cut the prices of their products for the third straight month.

The output prices index fell from the flash reading of 48.9 to 48.6, above July's 48.3. The input costs paid by factories also fell for the third month.

CORE CONCERN

Factories in Germany, Europe's largest economy, and France - the second biggest - saw activity fall for the sixth consecutive month although both saw an easing in the decline.

In Italy the main index (43.6) has now been below the break-even point for over a year and was worse than economists had predicted while in Spain it has been sub-50 since May last year.

The latter two countries are deep into austerity programs which are aimed at bringing their debt piles under control but also keep their economies stuck in recession.

They are looking for the European Central Bank help them escape this vicious circle by buying debt issued by their governments to bring down borrowing costs.

"The national picture remains one of widespread contraction, only Ireland saw manufacturing output rise. The situation in Italy is also becoming more of a cause for concern, as it falls further down the PMI league table," Dobson said.

The output index for the sector, which drove a large part of the bloc's recovery from the last recession came in at 44.4, below a flash 44.6 but above July's 43.4.

With the situation still gloomy factories reduced their headcount for the seventh month running. Official data released on Friday showed unemployment across the bloc in July held steady at June's record high of 11.3 percent.

General Motors Co's (GM.N) ailing German unit, Opel, has said it will cut the hours of several thousand workers at two of its four plants and France's struggling carmaker PSA Peugeot Citroen (PEUP.PA) is cutting over 10,000 jobs.

(Editing by Toby Chopra)

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Comments (2)
Numb3rTech wrote:
They are only at 11.3% unemployment?
Wow, sure makes the United States look good.
Another 5% more unemployment at they should be at the same level as the United States. Mr. President Obama’s jobs programs are working all over the world.

Sep 03, 2012 6:29am EDT  --  Report as abuse
GivaFromOz wrote:
” the European Central Bank is now widely seen cutting interest rates to a new record low of 0.5 percent “. What good will┬áthat do? It hasn’t helped the Us, UK or japan so why will it help the EU? Those you don’t need to borrow will not be enticed by the reduction from extremely low interest rates to a little lower ones. Those with funds to lend will become even more pessimistic and will not invest. Many will lend only to the “safest” of the cash strapped governments and some will speculate on the stock exchange, which explains (in my opinion) the stellar performance of US stocks. But that speculation does little, if anything, to bolster the real economies.

Current economic policies in the US and Europe are doing nothing for the savers, the people who have the money to invest to create economic activity. In fact they are counter-productive, because they destroy the confidence of the people with capital. Such policies are only effective at the margin, when fine tuning of a healthy, robust economy is required.

Sep 03, 2012 8:14am EDT  --  Report as abuse
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