Euro zone manufacturing growth remains stagnant

Euro zone manufacturing growth failed to accelerate as expected last month despite factories barely raising prices, as growing tensions in Ukraine weighed on sentiment, a survey showed today.

With inflationary pressure evaporating and factory activity shrinking faster in France, the region’s second-biggest economy, the data will make grim reading for the European Central Bank ahead of its monetary policy meeting later this month.

Markit’s final July manufacturing PMI came in at 51.8, matching June’s reading but below an earlier flash estimate of 51.9.

An index measuring output, which feeds into a composite PMI due on Tuesday that is seen as a good guide to growth, dipped to 52.7 from June’s 52.8, shy of a flash reading of 53.

While manufacturing growth picked up in Germany, Europe’s biggest economy, the French PMI fell to a seven-month low and there was a renewed downturn in Greece alongside slowing growth in Spain and Italy.

“The situation in the euro zone has clearly worsened from the promising signs of economic revival seen earlier in the year,” said Chris Williamson, chief economist at Markit. He said the final reading came in lower than the flash figure, “most likely reflecting growing concerns following the escalation of the crisis in Ukraine towards the end of the month.”

Highlighting the risk of deflation, the output price sub-index fell to 50.1 from 50.4, barely above the 50 mark denoting growth, while data on Thursday showed euro zone inflation fell in July to just 0.4 per cent, the lowest since the height of the financial crisis nearly five years ago.

“The ECB will be eager to see the impact of the policy measures announced in June, though these are clearly going to take some time to filter through to the real economy,” said Mr Williamson. To counter this threat, the ECB in June unveiled a raft of measures including cutting the deposit rate below zero and offering more long-term loans aimed at boosting bank lending to businesses.

A separate survey today also showed UK manufacturing grew at the slowest pace in a year in July as a cooling in new orders and output ended the first half’s “stellar growth spurt”.

A factory index slipped to 55.4 from a revised 57.2 in June, the London-based Markit Economics said today. Economists forecast a reading of 57.2 for July, from a previously reported 57.5 in June. An index of orders declined to 57.8 from 60.6 and a separate gauge of output also fell.

While the UK report suggests some loss of momentum, the gauge remains higher than the survey average of 51.5 and has showed expansion for 17 months.

Other indicators suggest continuing strength, with a report from the Confederation of British Industry showing factory orders at the highest level since 1995. “Although cooling in July, growth rates for production and new orders remain well above their long-run trends, supporting continued solid job creation,” said Rob Dobson, an economist at Markit in London.

“The rate of growth remains historically very strong to help contribute to yet another robust expansion of the economy in the third quarter.” The pound declined 0.3 percent after the report to $1.6833 at 10:28 a.m. London time. Rate Increases Data last month showed gross domestic product rose above its previous 2008 peak in the second quarter.

While the strength of the economy has prompted speculation about when the Bank of England will increase its benchmark interest rate from a record low, deputy governor Ben Broadbent told Bloomberg News this week that officials anticipate a slowdown toward the end of the year.

Markit’s UK index today is “a little disappointing, but it remains at historically high levels and still points to an acceleration in official manufacturing output growth,” said James Knightley, an economist at ING Bank NV in London. “It is possible that concerns over potential interest-rate rises are weighing a little.”