Euro zone factory growth subdued on trade fears, rising prices

[LONDON] Euro zone manufacturing growth remained subdued in July as worries about trade tensions, tariffs and rising prices kept optimism in check, a survey showed on Wednesday.

IHS Markit's July final manufacturing Purchasing Managers' Index only nudged up to 55.1 from June's 18-month low of 54.9, unchanged from an initial reading and still comfortably above the 50 level that separates growth from contraction.

The output index made a similar small move, rising to 54.4 from June's 54.2, which was its lowest reading since November 2016.

"A marginal uptick in the PMI provides little cause for cheer given it is the second weakest number for more than one-and-a-half years. Worse may be to come," said Chris Williamson, chief business economist at IHS Markit.

"The clear implication is that manufacturers may have to adjust production down in coming months unless demand revives."

But a new orders PMI matched June's 22-month low in July, the survey showed, which kept a lid on optimism. The future output index was 62.4, up from June's 60.7 but one of its lowest readings in two years.

Demand may also have been hit by rising prices. Inflation across the bloc was 2.1 per cent last month, above the European Central Bank's target of just below 2 per cent, official preliminary figures showed on Tuesday.

Last week, the ECB reaffirmed plans to end its 2.6 trillion euro(S$4.14 trillion) stimulus programme this year and keep rates at their record low level "through the summer of 2019".

"The survey responses indicate that the slowdown likely reflects worries about trade wars, tariffs and rising prices, as well as general uncertainty about the economic outlook," Mr Williamson said.

An escalating trade row between the United States and its trading partners remains a real risk to the euro zone and has prompted many economists polled by Reuters to trim their growth forecasts.

Euro zone economic growth slowed further in the second quarter, preliminary data showed on Tuesday, on what economists said were concerns over a possible trade war with the US.

REUTERS