LONDON, April 1 - Manufacturing in the euro zone shrank again in March, weighed down by worries over the Iraq crisis, after a brief attempt at growth the previous month, according to a survey of 2,500 firms published on Tuesday. Most of the responses in the March 14-25 poll for the Eurozone Purchasing Managers' Index came in before the Iraq war began on March 20 -- with no indication available whether the later replies were noticeably different. In Germany, France and Italy, the three biggest countries in the 12-nation bloc, 80 percent of responses came before March 20. The PMI slid to 48.4 in March -- back to its level last December -- after clambering briefly above the 50 line that divides growth from contraction to reach 50.1 in February. The consensus forecast was 49.5.
"The weakening...reflected a stagnation of output, falling order books and increasingly widespread cost cutting through further job losses and destocking," said NTC Research, which compiles the survey for . Some companies in Germany, the region's biggest and most troubled economy, said stronger demand in February had turned out to be largely a one-off boost from customers stocking up for fear that the war would disrupt prices and supplies. French panellists "reported that the build-up to and consequent start of war in Iraq had served to hit already brittle business confidence...and led to the widespread postponement of many, particularly large, investment and spending decisions," NTC said.
U.S. SURVEY
The survey is likely to reinforce expectations that the European Central Bank will cut interest rates again within a month or two, although a survey last week found most economists expected no move when the ECB meets on April 3 after it cut its benchmark rate to 2.50 percent in March. The equivalent U.S. survey of manufacturers, produced by the Institute for Supply Management, was due at 1500 GMT on Tuesday and was also forecast to slip back below 50 from 50.5 in February. The U.S. survey opened in early March and stays open for responses up to the day of release. In the euro zone, new manufacturing orders fell in March to 47.7, showing the biggest decline in demand since January 2002.
In Germany, the headline manufacturing index fell back to 47.8 after nearing stability at 49.9 in February. Companies said the surge in the value of the euro against both the dollar and sterling in recent months had helped to erode new order books by making German goods more expensive outside the euro zone. The euro spiked above $1.10 in March as markets fretted about the war's length and cost, most of which will be borne by the United States. It has since dropped back, but remains more than 20 cents above January 2002 levels.
RISING COSTS
In France, the main index fell to 48.1 from 51.5 in February, dragged down by the fastest fall in orders for 14 months. In Italy, manufacturing stagnated in March at an index level of 50.0, ending 13 months of sustained growth. "Panel firms widely reported that sales had been adversely affected by increased uncertainty as a result of the Iraq crisis," NTC said. In the face of falling demand for their goods, manufacturers' profits were squeezed by the rising cost of their raw materials. The input price index rose to 59.7, the highest since December 2000, from 59.3 in February, largely reflecting the surge in oil prices in recent months due to fears that war will disrupt supplies from the Gulf region.
Companies said higher energy costs were also feeding through into higher prices for materials such as steel. Across the euro zone, manufacturing companies cut more jobs than they created in March for the 22nd month running. "In the majority of cases, workforce cuts reflected the need to reduce costs in the face of falling order books and geo-political uncertainty," said NTC. Companies also tried to cut down their inventories, but "deliberate policies of stock reduction designed to cut costs were often frustrated by the build up of inventories due to slower than anticipated sales," NTC said.//