LONDON, Oct 1 - The euro zone manufacturing sector unexpectedly returned to growth in September for only the second time in a year as firms boosted output in response to stronger demand, according to a survey of about 3,000 companies. The Eurozone Purchasing Managers' Index jumped above the crucial 50 line that divides shrinkage from growth to 50.1 in September from 49.1 in August. It was above the consensus forecast of 49.7. "The main impetus to order books appears to be the domestic market in the big three euro zone economies," said Chris Williamson at NTC Research who forecast two months ago that the PMI would climb back above 50 in September. "It seems to be more of a consumer driven upturn... in Europe, Asia and the United States."
The survey compiled by NTC Research showed the first expansion since February, a month before the war in Iraq persuaded business and consumers to shelve spending and investment plans. The previous expansion was in August 2002. "It's encouraging...(and) important that it cleared 50 and the rise in new orders is welcome," said Julian Jessop at Standard Chartered in London.
GERMANY LEADS
Higher production in Germany, France and Italy raised the output index to 51.7, the first expansion since March, from 50 in August. The new orders index leapt to 52.0 in September, the highest since August 2002, from 50.1 last month. Germany showed the biggest gains. "New German orders show there is a global demand pick-up and more importantly that there is a domestic demand pick-up," said NTC's Williamson. "The German recovery does seem to be more broad-based...with orders for investment goods up at the same time as consumer demand." The survey shows that growing consumer and business confidence has started to encourage economic growth. It will reinforce perceptions that the European Central Bank will not cut interest rates again and that the next move is likely to be a rise from the current two percent.
"Our view already was that the European Central Bank would keep rates on hold," said Elwin de Groot at Fortis Bank in Amsterdam. "But we think they'll still keep rates at this low level for a considerable amount of time because there's a lot of uncertainty." The equivalent survey of manufacturers in the United States, compiled by the Institute for Supply Management is due later on Wednesday. The index was forecast to rise to 55.0 from 54.7 in August. Italy's PMI rose to 49.8 in September from 47.9 in August and the German index bounded over 50 to 50.2 in September, to show the first growth since July 2002, from 48.8 in August. France went against the trend with shrinking output, which left the PMI down at 48.6 from 49.8 in August. "The French survey does renew fears about the sustainability of economic growth in France," said NTC's Williamson. "In particular the pressure on exports from euro strength and competition from Asian countries." Outside the euro zone, the manufacturing survey for Britain showed growth continuing with a PMI reading at 52.9 in September from a revised 52.2 in August.
KEY IS JOBS
The euro has slowed continental European exports and growth this year and if it stays around $1.16, it could hamper future expansion. Also worrying is the lack of new jobs in the euro zone and continued attempts by companies to cut costs and boost profits with staff cuts. The employment index at 47.0 showed the 28th month of contraction. "Without an improvement in employment, the recovery could run out of steam," said NTC's Williamson. Prices of raw materials fell for the fifth month running, but the index at 48.7 was above 47.2 in August. Rising global demand was behind price rises, but many companies said euro strength had helped to keep import costs subdued. The survey covers Germany, France, Italy, Spain, Ireland, Greece, Austria and the Netherlands, accounting for about 92 percent of manufacturing activity in the 12-nation bloc.//