Manufacturing slumped in October

Manufacturing activity fell sharply in October in Denmark and the Netherlands as well as Ireland, raising fears that the euro…

Manufacturing activity fell sharply in October in Denmark and the Netherlands as well as Ireland, raising fears that the euro-zone economy, like that of the US, may already be shrinking.

Purchasing managers' indices for Denmark, Ireland and the Netherlands all dropped to record lows, while the Greek index showed the expansion of Greece's manufacturing sector was slowing to a halt.

The surveys augured badly for the overall euro-zone PMI, which is to be published today. It is expected to underline that the manufacturing sector is still in recession. Other data due next week are expected to show falling inflation, weaker business and consumer confidence and rising unemployment in the euro zone.

The European Central Bank is thought likely to respond to the increasing evidence of a sharp economic slowdown by cutting interest rates next Thursday, perhaps dropping its main rate from 3.75 to 3.5 per cent.

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But some economists warn that the bank's decision may be a closer call than most in the financial markets expect.

"The ECB knows that, if they don't cut, the reaction will be awful, but they believe a massive dose of monetary expansion is not going to be that helpful for the euro zone," said Mr Carlo Monticelli, economist at Deutsche Bank Global Markets Research. "They think that more considered action is not a sign of cowardice." The ECB has been under public pressure from euro-zone political leaders to cut interest rates as soon as possible, but senior bank officials have made it plain that such pressure is unhelpful and even counter-productive.

They say there is a good chance that the euro-zone economy will start to recover next year as the stimulus from rate cuts between last May and September feeds through.

Among the national PMIs published yesterday, the Dutch index fell to 42.7 in October from 46.1 in September, touching its lowest level in the survey's 20-month history. Any reading below 50 signals that the manufacturing sector is shrinking.

At the same time, the Dutch government's Central Planning Bureau reduced its forecast for economic growth, both for this year and for 2002, from 2 to 1.5 per cent.

In Denmark, outside the euro zone, the index fell from 48 to a record low of 43.7.

The overall index for the 12- nation euro zone stood at 45.9 in September, marking the sixth successive month of falling activity