Manufacturing sector contracts as demand slows

Slowing demand forced the Republic's manufacturing sector to contract sharply in October, according to the latest edition of the NCB Purchasing Managers' Index (PMI).

The seasonally adjusted index - an indicator designed to measure overall business conditions - declined to 48.8 last month, its lowest level since the end of last year and its first dip below 50 since January.

A rate below 50 in the index signals a decrease in activity compared to the previous month.

NCB chief economist Mr Dermot O'Brien acknowledged that the index results were not encouraging, but cautioned against taking them as evidence of declining activity in the wider economy, warning that it would be "alarmist" to do so.

"The reason we're not getting hugely concerned is that the rest of the economy is substantially insulated," said Mr O'Brien, noting that connections between the multinational-dominated manufacturing sector and the domestic economy appeared relatively weak.

He said that evidence of this two-track economy could be seen in retail and services data, both of which remained reasonably buoyant as manufacturing falters.

Mr O'Brien said the manufacturing sector as a whole was largely dependent on international factors for success, and that weakness in the index could thus be largely attributed to continuing concerns about the US economy.

This theory was borne out by manufacturing for the rest of Europe and Japan, also released yesterday.

In the euro zone, the Reuters PMI nudged to 49.1 versus a consensus forecast of 48.3. This was up from 48.9 in September and 50.8 in August, but still painted a pessimistic picture. The German output index jumped to 52.3 from an 11-month low of 44.3 in September and the euro-zone output index climbed to 51.6 in October from 49.1 in September.

Some economists saw this as a short-term relief and remained on guard for future disappointment.

"There is an unwillingness to bank on the recovery, so stocks remain low and companies won't boost investment because they are anxious about the outlook for final demand," said economist Mr Ken Wattret at BNP Paribas in London.

A breakdown of the Irish index shows that panel firms recorded their first drop in new orders in October since the end of last year. They attributed this to "tough global operating conditions, future uncertainty, a quieter domestic market and lower foreign demand".

The index shows that export orders declined for the third consecutive month, but at the strongest rate seen for 10 months.

Output levels, while managing to remain in positive territory, also appear to be slowing, recording their lowest rise in the year to date.

Purchasing activity was also scaled back over the month, with the fall-off in buying goods the sharpest seen since the end of 2001, as firms acted to conserve cash and reduce capacity.

There is evidence in the index that high fuel and insurance outlays combined to inflate input prices in October, but lower purchasing levels effectively eliminated this from rises in overall input costs. Efforts to reduce costs also appear to have affected workers, with employment levels within manufacturing firms falling for the second month in a row.

(Additional reporting by Reuters)