UPDATE 1-Swedish manufacturers feeling pinch from euro zone

Thu Nov 1, 2012 5:44am EDT

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(Adds details, analysts)

* Swedish manufacturing PMI at 3-1/2 year low

* Companies seeing declining demand due euro zone crisis

* Raises pressure for central bank rate cut

By Niklas Pollard and Helena Soderpalm

STOCKHOLM, Nov 1 (Reuters) - Activity at Swedish factories fell it its fastest rate in more than 3 years in October, a survey showed, boosting the chances of a rate cut to defend the previously robust economy from sinking euro zone demand.

The Nordic country's seasonally adjusted purchasing managers' index fell to 43.1 points for the manufacturing sector, data compilers Silf and Swedbank said on Thursday, with 50 points marking the divide between expansion and contraction.

Sweden withstood the euro zone debt crisis well in the first half of 2012, but growth has faded along with demand for the exports that account for half of the country's economic output - and 50 percent of which go to Europe.

"Activity within the industrial sector is still higher than the record low of 2008-2009, but some of the indicators are nearing those low levels," the data compilers said.

The index was the lowest since April 2009 and undershot the median forecast in a Reuters poll for a slight rise to 45.0 points from 44.7 points in September.

"Above all, export orders are down to 37.9 (points) and, with the exception of 2008/2009, these are the lowest export orders since the index was first started," Swedbank analyst Knut Hallberg said. "So this is a really weak PMI."

The Swedish crown weakened and benchmark debt yields slipped.

Manufacturers, such as telecom equipment maker Ericsson and truck maker Volvo, have reported weakening demand in Europe due to the euro zone debt crisis, after a first half of the year that was relatively buoyant.

The purchasing managers survey bore this out, showing that the sub-index for order intake in the sector slumped to 40.1 points last month from 42.1 in September as export orders hit their lowest level since February 2009.

RIKSBANK UNDER PRESSURE

Every bit of grim news coming out of the industrial sector, of key importance to the export-dependent country, raises pressure on the central bank to cut its key repo rate from the current 1.25 percent.

"As I see it, the Riksbank came very close to cutting at its latest meeting and the more figures we get like these, which underline the picture of a weakening economy, the greater the probability for more rate cuts," SBAB economist Tor Borg said.

The Riksbank left rates unchanged at its October meeting, but held out the prospect of a cut at its next meeting, in December.

The main factor seen having stayed the Riksbank's hand last month was worries about rekindling credit growth among households, which over the past decade have racked up large debts amid a boom in house prices.

"It seems credit growth must fall even more before the Riksbank acts. Even with today's figures, it's not sure they will cut the repo rate in December," RBS analyst Par Magnusson said. "A normal central bank would have cut the rate already."

For Reuters stories on PMI data, click on (Additional reporting by Daniel Dickson, Johan Sennero, Sandra Jansson; Editing by Toby Chopra)

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