Manufacturing in the 12 countries sharing the euro expanded for an 11th month in July, fueled by demand for European products in faster-growing economies abroad. An index based on a survey of about 3,000 purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc rose to 54.7 in July, matching the highest in almost four years recorded in May. Economists predicted a gain to 54.8 from June's 54.4, the median of 34 forecasts in a Bloomberg survey showed. A reading above 50 indicates expansion.
Exports are driving the euro-region economy's recovery from last year's slowest expansion in a decade. European Aeronautic, Defense & Space Co., Europe's biggest aerospace company, is among companies benefiting from growth in the U.S., Asia and Eastern Europe. With unemployment stuck at the highest since 1999, consumers are reluctant to increase spending. ``The economy isn't running on all cylinders, but we're getting a positive push from abroad,'' said Olaf Wortmann, an economist at Germany's VDMA machinery industry group, whose 3,000 members include ThyssenKrupp AG and DaimlerChrysler AG. Production expanded the fastest since September 2000 in July and orders increased, the PMI survey showed. The German PMI index rose to 56.6 in July from 55.9 in June. The index for Italy also increased, while the French index fell to 54.6 from 55.8 the month before, the survey showed. The euro gained half a percent today to $1.2076. Europe's Dow Jones Stoxx 50 Index declined 0.2 percent to 2644.74 points at 9:37 a.m. in London.
Europe Lagging
EADS said last week that second-quarter profit doubled as its Toulouse, France-based Airbus SAS unit delivered more aircraft. Siemens AG, Germany's largest engineering company, said that a recovery is ``arriving in our industry'' after profit rose 29 percent in the three months through June. The Organization for Economic Cooperation and Development in Paris is forecasting economic growth of 1.6 percent for the euro region this year. That's less than the 4.7 percent expansion the OECD predicts for the U.S. this year. The organization expects Japan to grow 3 percent. Cie. de Saint-Gobain SA, Europe's biggest building-materials distributor, said last week profit rose 3.6 percent in this year's first half as corporate spending in the U.S. picked up. ``We're confident for the year and for the second half, so we're able to increase our forecast for operating profit,'' said Chief Executive Jean-Louis Beffa. ``We expect progress in the U.S. economy, but progress of a lower magnitude. This may be compensated by an improvement in the situation in Europe.''
Too Reliant on Exports
Europe's economy may not be able to rely on exports to drive economic growth in the second half of the year amid signs global growth may have peaked. U.S. expansion slowed to a quarterly pace of 0.8 percent in the second quarter from 1.1 percent in the previous three months. The European Commission predicts the euro region's economy grew about 0.5 percent in the same period, after expanding 0.6 percent in the first quarter, the fastest pace in three years. ``Things could start slowing down abroad,'' VDMA's Wortmann said. ``It could be that we have already reached our highest growth rates, but that doesn't mean no more growth.'' The export-driven growth has yet to create jobs. The unemployment rate in the euro area is at 9 percent, the highest since 1999. Joblessness in France, the euro region's second- largest economy, increased in June and the unemployment rate in Germany, which accounts for around a third of the euro region economy, is the second-highest in the region.
Oil, Inflation
Another burden to the region's recovery is the surge in energy costs. Oil prices have risen 40 percent since the beginning of the year in London Brent Crude trading, reaching the highest since 1990 on Friday. The European inflation rate was at 2.4 percent for a second month in July, breaching the bank's 2 percent limit for a third month. The ECB said it expects inflation to remain above 2 percent for the rest of the year. ECB President Jean-Claude Trichet said last month that he sees ``satisfactory growth'' in the euro region and that inflation will slow after the current ``hump.'' At the July rate meeting, Trichet said low borrowing costs were ``lending support'' to the region's recovery. The bank's 18 policy makers meet on Thursday to set interest rates. Investors expect the bank to raise borrowing costs by March, interest rate futures trading shows. The yield on the March Euribor interest-rate future contracts was at 2.48 percent at 9:02 a.m. in Frankfurt, 48 basis points more than the ECB's benchmark interest rate. The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the euro's launch in 1999.
`Modest Growth'
Concern about job security means consumer spending remains a drag on the recovery. Consumers in Germany haven't increased spending in the past two years, and consumer confidence reached a one-year low during July. ``The market psychology seems to be that, without any sustainable pickup in employment and consumer spending, the ECB will stay on hold,'' said Kenneth Wattret, an economist at BNP Paribas SA in London. The bank has kept its benchmark lending rate at 2 percent for more than a year. Keeping borrowing costs at the lowest in nearly six decades buys time for the recovery to take hold. ``The outlook for sustained growth is being confirmed,'' said ECB council member Jaime Caruana on Friday. ``It's relatively modest growth.'' ///www.bloomberg.com