Euro zone crisis hits manufacturing


The euro zone's manufacturing sector contracted at its steepest pace in nearly three years last month as the debt crisis hammered confidence and new orders continued to dry up, a business survey showed today.

A downturn that began in the region's periphery is becoming entrenched in the region's biggest economies like Germany and France, the survey showed, suggesting the sector - which drove a large part of the recovery from the last recession - will drag on growth.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) dropped to 45.1 from 45.9 in April, slightly above a preliminary reading but marking its lowest reading since June 2009.It has been below the 50 mark that divides growth from contraction for 10 months and similarly the output index fell to 44.6 from April's 46.1, also the lowest since June 2009.

"The data suggest that the sector is contracting at a quarterly rate of around 1 per cent, suggesting that manufacturing will act as a major drag on economic growth in the second quarter," said Chris Williamson, chief economist at data provider Markit.

"All four of the largest euro zone nations are now reporting worryingly sharp downturns in their manufacturing sectors."Earlier data from Germany, Europe's largest economy and whose strength prevented the euro zone falling into recession in the first quarter, and France showed their manufacturing sectors contracted at the fastest pace in nearly three years.

Italy's factories contracted for the 10th straight month while in Spain the PMI fell below that of Greece's and posted the lowest reading of all the countries surveyed."Euro zone manufacturers reported a deepening downturn in May, indicating that the damage to the real economy caused by the region's financial and political crises continues to spread across the region."

Greece, long the centre of the financial maelstrom that has ravaged the EU, is due to return to the ballot box in three weeks for a crucial second election that may determine whether it remains a member of the currency union.

Its euro membership will hinge on whether voters create a government that rejects or accepts severe austerity as the price for receiving hundreds of billions of euros in EU bailout funds, on which the state now depends.

Recent Reuters polls of fund managers, economists, and money market traders have all suggested that battered Greece will still be a member of the 17-nation region come 2014.

As the downturn deepened firms cut staffing levels for the fourth straight month as they struggle to contain costs as they face decimated order books. New orders dwindled for the twelfth straight month in May with the sub-index falling to a six-month low of 42.6 from April's 43.5 as export orders continued to sink.

The fall comes despite firms cutting margins by only nudging up prices in the face of more rapidly rising input costs.

Inflation in the euro zone eased by more than expected to its lowest level in more than a year in May, giving the European Central Bank a little more room to lower interest rates to help revive economic growth across the continent, official data showed yesterday.