Recent survey points to a weakening EU manufacturing trend

The overall contraction in Eurozone manufacturing and services activity in September highlights the recent marked faltering in economic activity across the region and suggests that GDP growth in the third quarter could even struggle to match the 0.2 percent quarter-on-quarter rate achieved in the second quarter.

According to IHS Global Insight Chief U.K. and European Economist, Howard Archer, contracting new orders and export orders, falling backlogs of work and deteriorating confidence bode ill for activity in the fourth quarter. Waning employment growth adds to the worrying picture.

“Eurozone activity is losing momentum which is likely to weigh down on trade and, presumably, shipping activity,” Archer told SCMR in an interview from London this morning.

The surveys pile pressure on the European Central Bank (ECB) to quickly reverse its recent monetary policy tightening cycle rather than just halting it, with a near-term interest rate cut. Falling prices charged in the services and manufacturing sectors combined in September add to the evidence that Eurozone inflationary risks are rapidly dwindling and give the ECB scope to act.

The September purchasing managers’ surveys were even weaker than feared, adding to the recent stream of dismal Eurozone economic news. They show joint Eurozone manufacturing and services output contracting for the first time since July 2009.

The previously buoyant German economy saw manufacturing and services expansion slow to a crawl in September, while growth was similarly marginal in France following a sharp loss of momentum in September itself.

The Markit Group Limited – a global financial information services company with over 2300 employees – did not release any surveys for the other countries, but they reported that “the rest of the single currency area suffered the steepest contraction for over two years.”

According to IHS, Eurozone economic activity is clearly being held back by tighter fiscal policy increasingly kicking in across the region, and the major hit to confidence coming from the heightened sovereign debt tensions and financial market turmoil.

Also critically, slower global growth is now hitting foreign demand for Eurozone goods and services hard as was evident in the sharp contraction in manufacturing export orders evident in the September manufacturing PMI.

Manufacturing activity has also come under pressure from the waning of inventory rebuilding and high input costs. At least though, input prices have eased recently.

Not only did combined Eurozone services and manufacturing output contract in September, but new orders growth contracted significantly, as did backlogs of work. Meanwhile, business expectations in the services sector were at a 30-month low. Employment growth fell back to a 15-month low, adding to the recent deteriorating news on Eurozone labor markets which has worrying implications for consumer spending.

Better news saw input prices rise at the slowest rate for 22 months in September. Meanwhile, output prices fell marginally for the first time since July 2010. This reflected companies’ reduced pricing power in the face of weakened demand, as well as waning input prices.

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