Manufacturing growth softened in Europe and Japan in August, as high oil prices squeezed margins and first signs of a global economic slowdown dented export demand, according to surveys of purchasing executives. The Eurozone Purchasing Managers' Index, released on Wednesday, showed the bloc's manufacturing sector grew at its slowest pace in five months, while Britain reported a fall in new export orders for the first time in over a year. Weakening demand from China helped trim manufacturing growth in Japan, where the PMI survey was published on Tuesday. A slowdown is also expected in the United States, the world's biggest economy. The U.S. Institute for Supply Management's manufacturing index is forecast to slip to 60.0 in August from July's 62.0. The data will be published at 1400 GMT. The euro zone index fell to 53.9 from 54.7, the British PMI slid to 53.1 from 56.0 and the Japanese index slipped to 54.9 from 55.4. All three remained above the key 50 watermark between contraction and growth, but signalled slowing growth of output and order books. "It certainly looks like the momentum in the global economy is fading," said James Carrick at ABN AMRO in London. "Looking ahead, I think we are going to see continued weakness with high oil prices and the fact that in the U.S. higher interest rates and the impact from the tax cuts is dropping out."
MARGINS SQUEEZED
The soaring price of oil and other raw materials, such as steel, has pushed up manufacturers' costs across the globe. Companies, however, have been able to pass on some of their increased costs to their customers. In Japan, prices of finished goods rose for the first time since the PMI survey was launched in October 2001. But inflation of output prices remains much lower than that of input prices, putting pressure on margins and making manufacturers reluctant to increase costs further by taking on more staff. "If raw material price rises persist, we are likely to continue to see employment remaining subdued and even falling in some cases," said Chris Williamson, chief economist at NTC Research which compiles the European and Japanese PMI surveys for . In Britain and Japan, employment indices fell on the month but came in above the 50 mark. The euro zone employment index, however, signalled a 39th month of job losses. "The further deterioration in the employment component ... points to continued reliance on exports as the main driver of growth. So I think the ECB ... is unlikely to raise rates any time soon," said James Knightley at ING Financial Markets in London. The European Central Bank is seen keeping the refi rate at 2.0 percent at its Sept. 2 meeting and for the rest of 2004. In Britain rates are seen rising by 25 basis points to 5.0 percent by year-end. But the PMI survey provides further evidence that the five hikes the bank has administered since last November are starting to have the desired cooling effect. "With signs of a housing market slowdown becoming more prevalent and consumer spending moderating in July and August, the chances are rising that the Bank of England will not raise interest rates again this year," said Howard Archer at Global Insight.///