Manufacturing slows globally with EU sector hitting four-year low

Figures across euro zone still contracting but improving

Volkswagen workers. While
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 Germany, the Netherlands and Austria displayed the slowest rate of industrial production contraction across the euro zone, the figures also indicated a strong performance by so-called “peripheral” countries, a trend welcomed by analysts.

Volkswagen workers. While , Germany, the Netherlands and Austria displayed the slowest rate of industrial production contraction across the euro zone, the figures also indicated a strong performance by so-called “peripheral” countries, a trend welcomed by analysts.

 


The downturn in manufacturing activity in the euro zone eased last month, according to official figures released yesterday, suggesting an unexpected improvement in the bloc’s economic performance in May.

However, manufacturing data from the Institute of Supply Management showed activity falling to a four-year low, with the index reading 49 in May, down from 50.7 in the previous month, defying expectations for an increase to 51. Any reading under 50 indicates contraction of activity.

And in China, the HSBC China purchasing managers’ index (PMI) fell to 49.2, the lowest level since October 2012 and down from April’s final reading of 50.4.

Alan Ruskin, currency strategist at Deutsche Bank, said that while the ISM report would constrain thoughts of the Federal Reserve scaling back its quantitative easing, it was also weak enough to raise broader questions on global growth.

“This just goes to show what a knife-edge we are on for global risk, with very little between numbers that are too weak raising concerns about global growth or too strong for global risk because of Fed tapering fears,” he said.


Positive news
The US and Chinese data overshadowed the moderately positive news in Europe. Though euro zone manufacturing contracted again in May, its 22nd straight month of decline, the depth of the downturn eased for the first time in four months, with the reading of 48.3 the highest since February 2012 and above an initial estimate of 47.8 on May 23rd. All euro zone states recorded a slowdown in the rate of contraction in manufacturing.

However, the general trend of contraction suggests an ailing world economy that still needs a steady diet of central bank support.

While Germany, the Netherlands and Austria displayed the slowest rate of contraction across the euro zone, the figures also indicated a strong performance by so-called “peripheral” countries, a trend welcomed by analysts.

Spanish PMI jumped to a two-year high, while the manufacturing index for Greece reached its highest level in 22 months. Italy’s headline figure rose to 27.3 per cent, a four-month high.

In Ireland, the seasonally adjusted PMI posted 49.7 in May, just below the no-change mark of 50.0, signalling a third successive month of worsening business conditions.


Fractional fall
However, Investec said the rate of deterioration was only fractional. There was a slight fall in new orders recorded during the month, linked to slowing demand in domestic and export markets.

“Activity in the Irish manufacturing sector remained in contraction during May, albeit the pace of decline was the slowest seen since the PMI fell below the 50 no-change level in March,” said Philip O’Sullivan, chief economist at Investec.

While welcoming the better-than-expected data – particularly in peripheral countries – as “strong and encouraging”, Barclays Capital noted that PMI figures have displayed “unusually high volatility” during the past quarter and should be viewed with caution. However, it noted strong improvements in new orders into quarter two suggest further stabilisation in activity can be expected.

The positive figures from London-based Markit are likely to lessen the case for further intervention by the European Central Bank when it meets for its monthly rate-setting meeting on Thursday. Last month, the ECB cut the benchmark interest rate to a historic low of 0.50 per cent.