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Eurozone - Manufacturing drives rise in employment

24 August 2011

The 'Flash Eurozone PMI Composite Output Index', published by research firm Markit, was unchanged at 51.1 in August. The latest reading signalled a rate of increase identical to July's twenty-two month low and a further near-stagnation of private sector output.

Services output grew only modestly, posting the smallest increase in activity since September 2009. Meanwhile, manufacturing output stagnated, showing no growth for the first time in just over two years.

Output across both sectors rose only very modestly in Germany, showing the weakest rate of expansion since the country's recovery began two years ago. A slowdown to near-stagnation was seen in the German services sector while manufacturing output growth gained momentum, but nevertheless posted the second-weakest reading in the past 23 months.

Growth picked up in France but was up only slightly from July's 23-month low. The French services sector saw growth recover to the pace seen in June, but manufacturing output fell for the first time since June 2009.

Outside the Eurozone's two largest economies output fell for the third successive month, though the rate of decline eased slightly, reflecting a moderation in the rate of services sector contraction. Manufacturing output fell at the fastest rate for two years.

New orders fell marginally, contracting for the first time since August 2009. Weaker growth of services new business (the smallest rise since September 2009) was accompanied by the fastest drop in manufacturing new orders since June 2009 (and the third successive monthly decline). Manufacturers reported that new export orders had fallen for the second month running, with the rate of decline also the fastest since June 2009.

Employment continued to rise, but the rate of job creation was the weakest since last October. Service sector headcounts rose at the slowest rate since January, whereas in manufacturing the rise was the fastest in three months.

The reduced rate of payroll growth in part reflected a second consecutive month of falling backlogs of work, which declined at the fastest rate since November 2009. Lower levels of outstanding work usually indicate that existing capacity is more than sufficient to meet current demand. Backlogs fell at sharper rates in both services and manufacturing.

Looking ahead, the index measuring expectations of service sector activity in the coming year dropped sharply to its lowest since April 2009. In the 13-year history of the survey, the month-on-month decline in the index was exceeded only by the drops seen in October 2008 and October 1998. Meanwhile, the ratio of manufacturing new orders to inventories, which acts as a guide to near-term output developments, fell for the sixth month in a row to its lowest since April 2009.

Price pressures eased markedly during the month. Average prices charged for goods and services showed only a modest increase, the rate of inflation
moderating further from April's high to reach a nine-month low. Service sector charges showed a particularly weak rise, the smallest monthly gain since services charges began rising in February. But it is in manufacturing where the steepest turnaround in price pressures has been evident. Prices charged for goods showed the smallest monthly increase for a year in August, in marked contrast to the survey-record high seen back in March.

The slower rate of increase of selling prices reflected a combination of sluggish demand and a further substantial easing in input price inflation. Service sector input costs rose at the slowest pace for ten months, while manufacturers' input price inflation eased to a 20-month low, taking the overall rate of increase across both sectors down to the weakest since February of last year.

Chris Williamson, Chief Economist at Markit, commented "the Eurozone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years. The data raise the prospect that economic growth in the third quarter could be even slower than the disappointing +0.2% rise seen in the three months to June. Most worrying is the near stagnation in Germany, which suggests that the region's main engine of growth has stalled."

"A number of factors have hit growth, including a downturn in global demand, which caused exports of goods to fall at the fastest rate for over two years, and growing concerns about the economic outlook and the euro area's financial crisis, which caused business confidence to plunge. Most notable was a record fall in business confidence in the German service sector."

"With forward-looking indicators such as business confidence and new orders falling further, it is likely that the survey data will continue to turn down in September."


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