Euro zone factory downturn deepened in May: PMI

LONDON, (Reuters) - Manufacturing activity in the euro zone contracted for a fourth month in May, and at a faster pace, as the U.S.-China trade war, slumping automotive demand, Brexit and wider geopolitical uncertainty took their toll, a survey showed.

Smoke is emitted from a paper mill in Durango February 19, 2014. REUTERS/Vincent West

IHS Markit’s May final manufacturing Purchasing Managers’ Index was 47.7, matching an earlier flash reading but below April’s 47.9 and only just above March’s six-year low.

An index measuring output change, which feeds into a composite PMI due on Wednesday that is seen as a good gauge of economic health, also held below the 50-mark separating growth from contraction, coming in at 48.9. It was 48.0 in April.

“Euro area manufacturing remained in contraction during May, suggesting the sector will act as a drag on the wider economy in the second quarter,” said Chris Williamson, chief business economist at IHS Markit.

“A fourth successive monthly drop in output and further steep decline in new orders underscored how the sector remains in its toughest spell since 2013.”

Indicating there will be no turnaround anytime soon, the index measuring new orders held below the breakeven mark for an eighth month - although it rose to 46.6 from April’s 45.8.

Monday’s survey adds to evidence the bloc’s economy is under pressure and will likely be of concern to policymakers at the European Central Bank who have already raised the prospect of further support.

There is little likelihood of them raising interest rates before 2021, according to economists in a Reuters poll last week, who said the bank’s next policy move will be to tweak its forward guidance toward more accommodation.

Forward-looking PMI survey indicators suggest more support will be needed as the slowdown will continue this month. Purchasing of raw materials was reduced, headcount fell for the first time in nearly five years and backlogs of orders were run down.

“Companies are tightening their belts, cutting back on spending and hiring. Input buying, inventories and employment are all now in decline as manufacturers worry about being exposed to a further downturn in demand,” Williamson said.

Editing by Toby Chopra