LONDON, Dec 1 (Reuters) - Factories across Europe put in their worst performance during November since private survey records began more than a decade ago, intensifying pressure for aggressive interest rate cuts this week.
The gloomy news on euro zone and British output was accompanied by data showing inflationary pressures tumbling, removing any doubt that both the European Central Bank and the Bank of England will cut rates on Thursday.
The only debate now is over the size of the cuts, with economists generally agreed there is a greater risk the central banks will deliver larger cuts than the 50 basis point consensus.
The Markit Eurozone Purchasing Managers Index (PMI) for the manufacturing sector slumped to 35.6 in November, a low not seen in the survey’s 11-year history and well below the 36.2 flash reading and economists’ forecasts.
The European data echoed a survey published overnight showing Chinese manufacturing activity also slumped on a collapse in export orders, a report that came just days after an aggressive interest rate cut there.
A comparable report from the U.S. due at 1500 GMT is expected to show another lurch lower for manufacturing, which is already contracting very rapidly.
“The picture is very grim,” said Rainer Guntermann, economist at Dresdner Kleinwort in Frankfurt, describing the euro zone data. “And it’s a consistent picture - demand is falling, we’re seeing output cuts, a lengthening of delivery times, employment and prices under pressure.”
“We stick to the base case for the ECB to cut rates by 50 basis points, but the data would not stand in the way of a bigger rate cut from the ECB,” said Guntermann.
A poll of 81 economists last week showed a majority expecting a 50 basis point cut to 2.75 percent. Just over a quarter are looking for an even bigger cut. See: [ECB/INT]
Britain’s manufacturing PMI tumbled to a record low of 34.4, well below the Reuters consensus for 40.0. It was also the biggest one-month fall in the series, which began in 1992, at the tail end of Britain’s last recession.
Ross Walker, UK economist at RBS called it “an atrocious survey,” adding that it increased the pressure on the Monetary Policy Committee to deliver more than a 50 basis point cut after its December meeting ends on Thursday.
A Reuters poll last week showed most expecting a half point move but a significant minority, 31 of 67, forecasting either a 75 or 100 basis point cut.
Financial markets were little moved on the euro zone data but London stocks extended losses as did the pound after the UK figures were released.
The U.S. manufacturing survey for November from the Institute for Supply Management later on Monday is also expected to fall to a new cycle low of 37.0 compared with 38.9 in October.
At 35.6, the Markit euro zone PMI is now considerably below the 50.0 mark that separates growth from contraction and the outlook is far from rosy with output, new orders and backlogs of work at record lows, as were PMI indexes for all four of the biggest euro zone countries.
“We are afraid this is not the bottom for the manufacturing sector yet, as firms are still facing a high level of (unwanted) stocks, which calls for further production cuts in the coming months,” said Marco Valli at Unicredit.
The euro zone was officially declared in recession this month following a second quarterly contraction in economic output. Analysts do not see the economy growing again until the third quarter next year -- and then only marginally. [ECILT/EU]
Britain and the U.S., where retailers have been forced to slash prices to lure in shoppers, are seen in recession, while Japanese officials said earlier on Monday their economy was slowing rapidly.
Companies are now cutting payrolls aggressively given this is the sixth straight month the PMI has shown contracting activity. The employment index dropped to a new record low of 41.0. On Friday, Eurostat said unemployment in the euro zone had climbed to a near two-year high of 7.7 percent in October.
However, input price pressures falling to a seven-year low and the output price index sinking to a level not seen since July 2003 will strengthen expectations for a substantial interest rate cut by the ECB on Thursday.
Data released on Friday showed inflation across the 15- nation bloc plunged to 2.1 percent in November, only just above the central bank’s two percent target ceiling, following a sharp decline in oil prices.
Industrial activity declined across the region, with Germany, the bloc’s largest economy, posting a drop to a record-low 35.7 while France’s fell to a record low of 37.3. Italian and Spanish manufacturing activity also sank to record lows at 34.9 and 29.4 respectively.
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