Eurozone manufacturing growth weakens to lowest point since mid-2009

January 2012

With the single currency's future in doubt, many economists were not surprised by new figures showing that manufacturing growth in the eurozone has hit its weakest level since mid-2009. Production also declined, with output and new business falling in numerous sectors.

Manufacturing growth throughout the eurozone has dropped to its weakest level since the middle of 2009, despite declining more slowly in December 2011 than in the preceding months. Markit's purchasing managers' index (PMI), published on January 2nd of the new year, showed the final figure for 2011 to be 46.9 - up from November's 28-month low of 46.4, but provoking deep concern throughout a continent already shaken by austerity measures, unsustainable borrowing costs for some nations and a growing loss of faith in the single currency.

For the fifth consecutive month, manufacturing experienced a downturn against a backdrop of global financial turmoil, reduced orders and a slower economy. Similarly, production declined for the fifth month in a row, with the most notable contractions witnessed in Spain, Greece and Italy, the latter of which is already teetering on the brink of a bailout, many experts believe. Markit said although the eurozone's drop was flatter than that seen in November, it was sharp when compared to falls witnessed before the economic crisis hit. The consumer, intermediate goods and investment sectors all saw output and new business go down, with every eurozone nation reporting a decrease in output for the second consecutive month.

Indeed, as growth in Europe slows, governments are increasingly pressured to make further spending cuts. A majority of economists recently polled by the BBC believe recession will hit the eurozone again this year and both the German chancellor Angela Merkel and the French president Nicolas Sarkozy warned it would be a difficult 12 months for all. Chancellor Merkel emphasised that although Germany's financial situation is relatively stable, 2012 is likely to be much trickier than 2011, because Europe was facing its "most severe test in decades".

"The road to overcome [the debt crisis] remains long and not without setbacks, but at the end of this path Europe will re-emerge stronger from the crisis than it was when it entered it," she stated.

Austria registered the largest manufacturing PMI, as did France, with both hitting a four-month high at 49 and 48.9 respectively. Germany and the Netherlands ranked third and fourth, followed by Italy - which, while reaching a three-month high of 44.3, showed a "marked contraction" in output and a seventh consecutive month of reduced new business, demonstrating overall signs of deteriorating business conditions resulting from weaker domestic and international demand. The figures come at a tough time for Italy, given its near-unsustainable interest rates on long-term debt and a burgeoning need for even harsher cost-cutting measures.

So, does the eurozone's troubling manufacturing figures suggest it will slide into recession soon? And what effect will this have on the UK?

Chief economist at Markit Chris Williamson said with production levels "collapsing", it was clear the eurozone was slipping into a recession, while IHS Global Insight economist Howard Archer said manufacturers were now "very much on the back foot".

"[They are] finding life extremely challenging as domestic demand is hit by tighter fiscal policy across the region, squeezed consumer purchasing power and heightened eurozone sovereign debt tensions," he explained.

In addition, refinancing pressures and the threat of further bailouts are leading the euro to hit record lows on its tenth anniversary, experts suggest. Arne Lohmann Rasmussen, Danske Bank Copenhagen head of currency research, told Reuters that the single currency's instability and the eurozone leaders' coming challenge to prevent the sovereign debt crisis from expanding any further was pushing investors to "safer assets" such as the Japanese yen.

Mr Archer, in a note to clients at the end of 2011, said policy makers need to "get a real grip on matters quickly".

"We expect eurozone recession to occur in late 2011 and the first half of 2012 in the face of ongoing eurozone sovereign debt crisis," he was quoted by Bloomberg as stating.

His comments were echoed by the BBC, which said that the longer the debt crisis continues, the less confidence the currency will have in global financial markets. Indeed, continuous threats of credit downgrades and a potential split in the 17-nation zone means the pressure is growing - and if Europe grinds to a halt, it may be difficult for the UK to avoid slipping, chancellor of the exchequer George Osborne told BBC Breakfast back in November.

"We are very affected by what happens in the eurozone," he added, prior to comments from Bank of England deputy governor Charlie Bean on the possibility of a UK rating downgrade and the chances of nations pulling out of the euro.

"We hope for the best but plan for the worst. If there are serious storms coming from across the Channel that we have to cope with, there are a number of things we can do," he was quoted by the Daily Mail as saying.

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