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Decline in German manufacturing drags down EU factory output

London

FACTORIES across the eurozone unexpectedly shunted into reverse this month as activity in manufacturing powerhouse Germany declined again amid trade tensions and struggles in the car sector, surveys showed.

While that downturn was offset by a much faster than expected acceleration in services activity - which meant that overall private sector growth picked up modestly - it will likely worry policymakers as factories also drive the bloc's dominant service industry.

IHS Markit's Flash Composite Purchasing Managers' Index (PMI), which is seen as a good guide to economic health, rose to 51.4 this month from a final January reading of 51.0, above a Reuters poll median expectation for 51.1 but still below where it has been for much of the past four years.

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"This does not mean that growth worries are over as the manufacturing output index dropped to below 50, signalling contraction for eurozone industry for the first time in almost six years," said Bert Colijn at ING.

The flash manufacturing PMI tumbled to 49.2 this month, its lowest since mid-2013 and substantially below the 50-mark that separates growth from contraction.

A Reuters poll had predicted a modest dip to 50.3 from January's final reading of 50.5. The lowest forecast in the poll of 38 economists was 49.6.

An index measuring output, which feeds into a composite PMI, dropped to 49.2 from 50.5, its lowest reading since May 2013. In a further sign of how manufacturers are struggling, the new orders index fell to a near six-year low of 46.2 from 47.8.

Adding to that gloomy picture, factories ran down old orders faster while also building up a stock of completed products.

In France, the bloc's second biggest economy, business activity shrank marginally as manufacturing growth helped offset a slack in services that has dogged firms in the wake of anti-government protests.

But Germany's vast manufacturing sector contracted for a second month. That comes only weeks before Britain, Europe's second-largest economy, is due to leave the European Union, uncertainty around the US-China trade war continues and new pollution standards are still affecting car makers.

"While there were some moderately encouraging signs from the Composite PMI, all is not well in the manufacturing sector," said Jack Allen at Capital Economics.

In contrast, demand for services across the currency union picked up and firms were able to build up a backlog of work, so a PMI for the services industry jumped to 52.3 from 51.2, above a Reuters poll consensus for 51.4.

That helped to raise optimism, with the business expectations index bouncing to a four-month high of 61.6 from 60.5 and firms taking on new workers at a faster rate.

On Tuesday, official figures showed that consumer confidence in the bloc rose more than expected this month but remained consistent with only modest household spending growth. REUTERS