Business

Euro zone manufacturing malaise spreads to core, says survey

April 02, 2012

LONDON, April 2 — The euro zone's manufacturing sector shrank for an eighth month and at a faster pace in March, adding to signs the bloc is in recession as the downturn spread to core members France and Germany, a survey showed today.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) dropped to 47.7 last month from 49.0 in February, in line with a preliminary reading. It has now been below the 50 mark that divides growth from contraction since August.

“Euro zone manufacturers suffered a miserable March. Ongoing steep downturns in the periphery are now being accompanied by signs of renewed weakness in countries such as Germany and France,” said Chris Williamson at data provider Markit.

Earlier data from Germany, Europe's largest economy, showed its manufacturing sector contracted last month and it was a similar story in neighbouring France.

In Spain, struggling to implement swingeing austerity measures demanded by the European Union to meet tough deficit targets, the sector contracted for the 11th month. Manufacturing in Italy shrank for an eighth month.

The economic slump will make it even harder for the 17-nation euro zone to overcome its debt crisis as it will depress tax revenues and hurt consumer spending.

Periphery countries have borne the brunt of the sharp downturn as their own austerity measures continue to hamper a return to growth, particularly Greece where the sharp decline in manufacturing continued last month.

New orders dwindle

The euro zone new factory orders index fell to 45.4 from February's 47.3, having now been below 50 since June.

Usually when the new orders index falls there is a subsequent drop in the following month's headline index.

“Prospects for April also look poor, with companies reporting steeper rates of decline for both new orders and backlogs of work,” Williamson said.

The output index fell to 48.7, revised down from a flash reading of 48.8 and below February's 50.3. With backlogs of work falling some of that output came from fulfilling existing orders.

Output, which feeds into Markit's wider composite PMI gauge of the euro zone economy, has shrunk in all but two of the last eight months.

In an effort to stimulate growth and boost liquidity, the European Central Bank has cut its main refinancing rate to a record low of 1.0 per cent and pumped more than 1 trillion euros (RM4 trillion) into the banking system. But is now expected to adopt a wait-and-see approach.

With inflation running at 2.6 per cent in March, having slowed less than expected, it has made the ECB's job that much harder as it has an inflation target of just below 2 per cent.

A Reuters poll predicted last month that the ECB's liquidity boost would pay off and the bloc's economy as a whole might exit recession in the second quarter.

Increasingly, firms have resorted to cutting employment to control costs, and employment fell overall in March at the fastest rate for two years. Official data due later today is expected to show unemployment crept up to 10.8 per cent in February. — Reuters 

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