LONDON, June 2 - The contraction in euro zone manufacturing activity accelerated unexpectedly last month as the euro's strength hit exports, orders fell, and more workers were laid off, a survey of around 3,000 companies showed on Monday. The single currency's rise against the dollar also helped to drive raw material costs down sharply for the first time since March 2002.
The Purchasing Managers' Index for manufacturing in the 12-nation bloc slipped to 46.8 in May from 47.8 in April instead of rallying to 48.2 as economists had predicted in a poll last week. "Obviously very disappointing. Much weaker than expected," said Robert Lind at ABN Amro in London.
"Clearly as we can see from the German and French data we've seen a big drop in export orders which is disturbing and it clearly shows the effect of euro strength." The fall took the index to its lowest in 16 months and even further below the 50 line that separates growth from contraction. "The strength of the euro was seen to have damaged export performance, but benefited manufacturers through a reduction in prices paid for imported inputs," said NTC Research, which compiles the survey.
The euro was launched in January 1999 and was persistently weak for the first three years. But it has risen steadily since early 2002 and smashed back above its launch rate of $1.1747 in late May. It now stands some 13 percent higher than in January this year and more than 35 percent above January 2002 levels. Cheaper imports and lower oil prices in the wake of the Iraq war pushed the input prices index to 48.2 in May from 56.2. The output index dropped to 48.6 from 49.4 in April and the new orders index collapsed to 45.6 from 47.2, with the sharpest falls seen in Germany, the euro zone's biggest economy.
UNSUPPORTIVE POLICIES
The German PMI slid to 44.7 in May from 45.9 in April, keeping it below 50 for the 10th month running and marking its sharpest decline since January 2002. German companies said the drop in export orders triggered by the Iraq war and the SARS epidemic in Asia had accelerated as the euro jumped in May. And the stagnant domestic economy had been a key factor behind the weakness of total orders. "Specific mention was made...of current economic policies in Germany, which many firms deemed as unsupportive of economic recovery," said NTC research. Germany's government is under presure to cut spending and raise corporate and consumer taxes to try to honour a euro zone pact to curb budget deficits. Economists say the survey, which has been going for nearly six years and covers about 92 percent of manufacturing activity in the euro zone, offers timely signals on output and growth.
It will reinforce expectations that the European Central Bank may cut interest rates by half a percentage point to 2.0 percent at its next meeting on June 5. "The survey makes a 50 basis point cut this week more likely," said Gwyn Hacche at HSBC in London. "The prices index raises deflationary concerns for the euro zone. We think Germany is heading for deflation...there's probably quite a bit more rate-cutting to come."
An equivalent survey of manufacturers in the United States, compiled by the Institute for Supply Management, is due later on Monday. The U.S. index in April stood at 45.4.
MORE JOB LOSSES
The Italian PMI, at 48.6 in May after 49.0 in April, showed contraction for the second month running and in France, the index at 46.1 from 48.3 showed the third consecutive month of shrinking activity. French companies cited a slowdown in the domestic economy and a reluctance to commit to significant investment and capital spending given the uncertain global economic climate.
Euro zone companies under pressure to stay competitive shed jobs aggressively for the 24th month running, pushing the employment index down to 45.1 in May from 46.2 in April, the lowest reading since January 2002. Germany again led the decline, NTC Research said. "Over-capacity was widely reported to be the key factor...with firms looking to eliminate those positions which were no longer necessary or economically viable." The euro zone stocks of purchases index at 46.2 in May from 46.5 showed the 26th monthly decline, allowing suppliers to more quickly meet demand from manufacturers. The suppliers' delivery times index rose to 51.2 in May from 50.3 in April.//