Deeper euro zone factory downturn hardens stimulus view

LONDON Fri Nov 2, 2012 5:45pm GMT

Employees of Fiat SpA work on a new ''Panda'' car at the Fiat plant in Pomigliano D'Arco, near Naples, in this December 14, 2011 file photo. REUTERS/Alessandro Bianchi

Employees of Fiat SpA work on a new ''Panda'' car at the Fiat plant in Pomigliano D'Arco, near Naples, in this December 14, 2011 file photo.

Credit: Reuters/Alessandro Bianchi

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LONDON (Reuters) - Euro zone manufacturing shrank for the 15th month running in October as output and new orders fell, a survey showed on Friday, fuelling expectations of further easing from the European Central Bank.

Manufacturers were the driving force behind the bloc's recovery from the last recession, but the downturn in factory activity that began in smaller periphery countries has now engulfed core members Germany and France.

Europe is expected to remain the biggest drag on the world economy next year as its sovereign debt crisis rumbles on, and the situation deteriorated further in Italy and Spain - the two countries most worrying investors with whether they can keep paying their debts.

Ireland was the only one of the 17 countries using the euro seeing growth.

"The situation in the core economies is worsening. Rather than the strength in the core dragging the periphery out of recession it appears more likely that the core will follow the periphery into recession," said Ben May at Capital Economics.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) fell to 45.4 in October from September's 46.1. The October figure was just up from an earlier reported flash reading of 45.3. The index has been below the 50 mark that divides growth from contraction since August 2011.

The manufacturers' output index sank to 45.0 from 45.9.

Earlier data from Germany, Europe's largest economy, showed its manufacturing sector shrank for the eighth month and French figures showed a decline in all but one of the last 15 months.

In Spain, likely to become the next country to be bailed out by the European Union, the pace of decline accelerated. The picture was similar in Italy.

Flagging growth prospects for the euro zone's biggest economies will prompt the ECB to ease monetary policy more in the next few months and cut interest rates to a new record low of 0.5 percent, a Reuters poll showed on Thursday.

"All in all, the picture for the economy remains extremely sluggish. Further rate cuts would be fully justified by the current economic scenario," said Annalisa Piazza at Newedge Strategy.

The bank holds its next policy meeting on Thursday.

Data due on Tuesday is expected to show the bloc's dominant service sector has contracted for all but one of the last 14 months.

Markets were unfazed by the latest data with little movement in European stock markets or the euro.

GLOBAL GLOOM

The 17-nation bloc's economy almost certainly slipped back into recession last quarter and may have to wait until 2014 before it recovers from its decline this year, with only feeble growth expected next year.

On Thursday, sister PMI surveys showed big Asian economies are only slowly picking up after a year spent battling against global headwinds and that Britain's factories are facing a deepening decline.

In the United States manufacturing grew in October at its slowest pace in more than three years, its PMI showed, but an Institute for Supply Management survey said growth in manufacturing picked up modestly as new orders improved.

As global factory activity slows, demand for the euro zone's goods has dried up. The new orders sub-index fell last month to 43.3 from September's 43.5, marking its 17th month below 50.

It was pulled down by new export orders falling for the 16th month despite factories cutting their prices again in the face of rising input costs.

"Manufacturers faced a restrictive combination of weak demand from domestic markets and declining intra and extra-euro area trade flows," Chris Williamson, chief economists at data collator Markit said.

(Reporting by Jonathan Cable; Editing by Hugh Lawson)

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