June 2 (Bloomberg) -- European manufacturing contracted for a third month in May as the euro's 11 percent increase against the dollar this year made exports more expensive and rising unemployment damped consumer spending. Volkswagen AG and Schneider Electric SA have said the euro's appreciation will hurt exports. Orders in the dozen euro nations fell to the lowest in 18 months. French President Jacques Chirac is among the politicians to suggest that the European Central Bank should cut interest rates at its meeting on Thursday in an effort to stem the currency's gain. ``It's bad for any company, any economy, if you have an overvalued currency,'' said Victoriano Munoz, chairman and chief executive officer of Madrid-based Acerinox SA, Europe's fourth- largest stainless steelmaker, in an interview. An index based on a survey of purchasing managers at about 2,500 companies in the euro region by Henley-on-Thames, England- based NTC Research for Group Plc fell to 46.8, the lowest since January 2002, from 47.8 in April. Economists had predicted an increase to 48.2. A figure below 50 indicates contraction.
Koenig & Bauer AG, the German maker of printing machines that produce 90 percent of the world's money, said last month the dollar's decline against the euro is ``catastrophic,'' with U.S. customers delaying orders. The company is negotiating with labor unions to cut as many as 500 jobs in response to waning demand. U.S. manufacturing probably showed signs of improvement in May, economists said before an industry report today. The Institute for Supply Management's factory index increased to 48.5 in May from 45.4, according to the median forecast in a Bloomberg News survey.
ECB May Cut
The euro's gains eroded Europe's trade surplus to 1.6 billion euros ($1.9 billion) in March from 11 billion euros a year earlier. Exports are equivalent to about a third of the euro region's $8 trillion economy. The euro was trading at $1.1681 in 12:19 p.m. in Frankfurt. The ECB last trimmed its benchmark interest rate in March, to 2.5 percent from 2.75 percent. All 33 economists surveyed by Bloomberg News said they expect at least a quarter-point rate reduction at the ECB's meeting on Thursday. ``The ECB has enough ammunition to cut rates,'' said Joerg Kraemer, chief economist in Frankfurt at Invesco Asset Management, which oversees $178 billion. ``The economy is headed south.''
Rising Unemployment, Slowing Inflation
Business and consumer confidence in the euro countries fell in May, two separate surveys by the Brussels-based European Commission of 25,000 companies and the same number of consumers showed today. Joblessness rose to 8.7 percent in March, a three- year high, and economists said a report tomorrow will show it climbed to 8.8 percent in April. Interest-rate futures contracts suggest investors are betting on another rate cut. The yield on a three-month Euribor contract maturing this month was at 2.17 percent at 12:18 p.m. in Frankfurt compared with the ECB's benchmark rate of 2.5 percent.
The ECB, whose goal is to keep the annual inflation rate in the euro area just below 2 percent, has room to cut because consumer price increases are slowing, economists said. The annual rate fell to 1.9 percent in May from 2.1 percent in April, an initial estimate by the European statistics agency showed today. Siemens AG, Germany's largest electronics company, said it will eliminate 345 jobs at network equipment and mobile phone factories in Belgium in response to falling demand. Siemens has announced plans to cut almost 20,000 jobs at its unprofitable Information and Communication Networks group. ``Export orders are being throttled by the exchange rate, and there's nothing at home to take their place,'' said Richard Batley, an economist at HBOS Treasury Services Plc in London. ``Europe doesn't show any signs of pulling itself up by its bootstrings.'' The German economy, Europe's largest, shrank in the first quarter, as did those of Italy and the Netherlands. //www.bloomberg.com