Euro-Area Factories See Slump Worsen Amid Weak Global Demand

(Bloomberg) --

Euro-zone manufacturing remained near the weakest in seven years last month, a poor start to the final quarter that raises pressure on the region's governments to add fiscal stimulus to insulate the region from a worsening global slowdown.

Factories from China to the U.S. are suffering from flagging demand. While a Purchasing Managers' Index for the 19-nation euro region rose slightly, it shows the sector firmly in contraction. Job losses accelerated and order books deteriorated.

Germany with its export-reliant industry continued to be the principal source of frailty. Italy, Spain and Austria all also weakened.

“The goods-producing sector is on course to act as a severe drag on GDP again in the fourth quarter,” said Chris Williamson, chief business economist at IHS Markit. “Geopolitical concerns, ranging from Brexit to U.S. trade policy, continue to create uncertainty.”

Investors nonetheless sent encouraging signals in November. A gauge for economic expectations rose to the highest level in six months, suggesting the euro area may be able to avert a deeper crisis.

It's still a long route to recovery though. An index of the outlook for China's industry dropped in October to the lowest level since February, signaling continued contraction. Factory activity in the U.S. trailed estimates and indicated the sector shrank for a third straight month, with the weakest production level since the last recession.

In the euro area, jobs were cut at the fastest pace since the start of 2013, a trend IHS Markit called “especially worrying” as it increases the risk that the downturn will spill over to households. Incoming new factory orders fell “sharply,” and demand was weak across both domestic and international markets.

Services, which make over 70% of the euro-area economy, have so far proven relatively resilient. While sectors such as health care and education are generally largely immune to cyclical swings, others including transportation or technology would be among the first to suffer.

“So far, there has been little sign that weaker demand has affected business services, although recent survey data point to a slowdown in growth,” the European Central Bank said in an article published Monday. Developments “need to be monitored closely in coming months for signs of spillovers from the manufacturing slowdown.”

The ECB and the International Monetary Fund have urged governments to step up spending. President Mario Draghi made a last call for fiscal stimulus as he ended his term last week, and his successor Christine Lagarde is widely expected to continue the effort. The central bank rolled out a contentious new monetary stimulus package in September in an attempt to revive growth and inflation.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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