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Euro Zone PMIs Show Biggest Country Split in 7 Years

Reuters
Tuesday, 1 Apr 2008 | 5:23 AM ET

Euro zone manufacturing activity cooled in March, but there was the biggest growth split among leading economies in seven years, while price pressures spiraled higher, a survey showed on Tuesday.

The RBS/NTC Eurozone Purchasing Managers Index for the manufacturing sector eased to 52.0 in March from 52.3 in February, in line with economists' forecasts and unchanged from the flash estimate published 12 days ago.

The figures are likely again to show a sharp contrast with U.S. data from the Institute for Supply Management due at 9 am New York time which are expected to show a dip to 47.5 from 48.3, below the 50.0 mark that divides growth from contraction.

Signs of slower but not sagging growth in the euro zone as a whole, coupled with rocketing price pressures, will probably see the European Central Bank hold off on cutting rates and leave them steady at 4.0 percent for several months at least.

The survey showed factory output took a sharp hit in March, cooling to 52.1 from 53.7 in February to reach its lowest level since August 2005. But the ECB will also probably be concerned that the top four euro zone economies diverged even more.

"We are seeing a two-speed manufacturing sector in Europe," said Dominic Bryant at BNP Paribas. "Germany is holding up reasonably well, while Italy is capitulating and Spain is in free-fall across the economy."

"The big news that goes against our forecast for a June rate cut is inflation. There are significant risks that rate cuts will be delayed," he said.

Indeed, while activity hit a seven-month high in Germany and remained in robust territory in France, Italy slipped into contraction for the first time since June 2005, while Spain fell to its lowest since December 2001.

That marked the fourth consecutive month of contraction in the Spanish manufacturing sector. Italy and Spain together make up roughly the same weight as Germany in the euro zone.

"This suggests that Euro zone manufacturing activity could come to a standstill by the middle of this year," said Martin van Vliet, economist at ING.

But financial markets, focused on yet another huge $19 billion writedown related to investments linked to U.S. mortgage products by Swiss bank UBS, shrugged off the data.

A separate survey showed inflationary pressure in Britain's manufacturing sector soared in March, with cost inflation at a 13-year high and companies raising prices at the most aggressive rate on record.

Inflation Worries

Record high inflation could stop the ECB from reacting to slower growth with a rate cut.

Official inflation in the euro zone raced past expectations to hit a record high of 3.5 percent in March compared with 3.3 percent in February. The ECB prefers to keep it close to but slightly below 2 percent.

Input prices faced by factories soared even higher in March as oil held at high levels over $100 a barrel and food prices jumped. The input prices index jumped to its highest since September 2006 at 68.6.

Yet companies found it a little harder to pass on higher costs than last month, reflecting weaker demand, the survey showed. The output prices index eased to 55.5 from 56.4, still up on the 55.3 seen for the flash.

But employment prospects picked up slightly in March. The index rose to 52.5 from 52.1, its highest since September 2007.

Germany saw a high level of job creation, in contrast with Spain which saw the fastest pace of decline in three years.

Contact Europe: Economy

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