May 5, 2008 / 5:11 AM / 12 years ago

Euro zone manufacturing slows as Italy, Spain slide

* NTC/RBS Eurozone Manufacturing PMI <PMI/EUMA> falls to 50.7 in April (50.8 Flash, March 52.0), its lowest since August 2005

* New orders and new export orders fall to their lowest since May 2005

* Output falls to 51.9 (52.2 Flash, March 52.1), lowest since August 2005

* Output prices jump to 56.4 (56.3 Flash, 55.5 March), back to February’s 11-month high level

By Nigel Davies

LONDON (Reuters) - Euro zone manufacturing activity fell to its slowest pace in nearly three years in April as Italy and Spain slipped further into contraction, a survey showed on Friday.

The RBS/NTC Purchasing Managers Index for the manufacturing sector fell to 50.7 in April, just below the 50.8 flash reading and economists’ forecasts.

The index, now only just above the 50.0 mark that divides growth from contraction, provides growing evidence of a cooling euro zone economy, with indications that worse is to come as new orders shrank for the first time since May 2005.

An expensive euro EUR=, which flirted with the $1.60 mark in April, and a broad slowdown in global growth hit factories over the month. The euro has since fallen back to around $1.55.

However, price pressures remained high and will support the European Central Bank’s case for leaving rates on hold at 4.0 percent when it meets next week.

Germany saw a sharp slowdown in the pace of activity in April, but managed along with France to stay above the 50.0 mark.

In contrast manufacturing in Italy and Spain sank further with their indices continuing to show contraction for the second and fifth months running respectively. The Spanish PMI hit a six-year low in April.

The euro and financial markets were unfazed by the data.

“Spain and Italy are underperforming and that will need to be carefully monitored in coming months to see if there is going be contagion to the core of the euro area, which is resisting better,” said Guillaume Menuet at Merrill Lynch.

However, he said the fall in the euro and inflation at the end of April could well help the manufacturing sector going forward.

“It might be slightly premature to expect more sizeable downticks in May and June.”

Factory output cooled further in April. The output index slipped to 51.9 from 52.1 in March, its lowest since August 2005 and just below the 52.2 flash estimate.

Manufacturers also saw a plunge in orders taken. The new orders index fell to 48.6 from 50.9, while the export orders index fell to 49.7 from 51.1, just below the 49.8 flash reading. Both were at their lowest since May 2005.

But signs of slower growth to come contrasted with elevated price pressures as oil, energy and food prices all surged higher.

The output prices index rose to 56.4 from 55.5 the previous month, just up on the 56.3 flash and suggesting firms found it slightly easier to pass on high costs.

Survey manager NTC said price pressures could well increase in coming months given there had been no real let-up in a surge in oil prices. U.S. crude oil rose close to the $120 a barrel mark in April, up from around $100 at the start of the month.



Reporting by Nigel Davies; Editing by Gerrard Raven

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