It is reported that activity at euro zone factories slowed to a near standstill in July 2011, suggesting the region's economy made a poor start to the third quarter, while official data showed more people lost their job in June 2011.
The Markit final euro zone manufacturing purchasing managers' index, a gauge of activity based on a survey of about 3,000 firms, fell to 50.4 in July from 52 in June, its lowest level in almost two years.
The fall in the index towards the neutral 50 level suggests growth in the 17 nations that share the euro is drawing closer to stagnation. A reading below 50 would signal contraction.
Activity doesn't look likely to rebound in the coming months. New orders, a forward looking indicator of activity, fell to a sub 50 index reading of 47.6, the lowest since June 2009. The euro showed scant reaction to the headline PMI figure, which confirmed an earlier estimate published on July 21st 2011.
But signs that the euro zone economy made a sluggish start to the third quarter are likely to add pressure on the European Central Bank to call a halt to further increases in its key interest rate. The bank, which will announce its latest decision, raised its key rate by 0.25 of a percentage point in April and again in July, to 1.50%, in a bid to curb an above target inflation rate.
Markit said that economists don't expect any change to policy at the upcoming meeting. But the past rises will make life harder for countries like Greece, Portugal and Ireland that are struggling with high levels of debt. Greece's manufacturing sector fell deeper into contraction at 45.2. Spain, another country that could yet face similar difficulties, saw its factory reading fall to 45.6, the weakest in a year and a half.
Unemployment figures provided further signs of trouble. Eurostat, the euro zone's official statistics agency, said the number of people without jobs rose for the second straight month in June, although the increase was too small to affect the unemployment rate, which was unchanged at 9.9% for the fourth straight month.
Added to a fall in real incomes as energy and food prices rise more rapidly than wages, and households' unwillingness to draw on their savings, the data suggest consumer spending is likely to remain weak.
Sluggish economic performances, as signaled by Monday's figures, could be a major hurdle to euro zone countries' attempts to curb their debts, because it means lower tax receipts and higher social security burdens forcing governments to borrow more.
Mr Jens Sondergaard, economist at Nomura, said that it is possible the weak PMI figures reflect temporary factors, such as sovereign debt concerns in Europe and the US and the disruption caused by Japan's earthquake in March.
But a more pessimistic interpretation is that today's numbers are the first signs that the near term economic outlook is significantly worse than our central case. Nomura anticipates economic growth to slow in the second quarter and stage a very modest rebound in the third quarter.
Mr Sondergaard said the ECB is probably in wait and see mode in terms of future rate decisions, and will watch keenly for the official gross domestic product figures for the second quarter, due later in August.
Markit said that factory activity in the two biggest euro zone nations expanded in July, albeit at a reduced pace. German factories recorded a 21 month low growth rate of 52.0, while France's sank to a two year low of 50.5. Italy, the third largest economy, edged back into expansion at 50.1.
(Sourced from www.dowjones.com)
