Slowing Euro-Area Manufacturing Adds to Case for ECB Action


Euro-area manufacturing activity slowed more than initially estimated in August as Italian output contracted, adding to signs that the region’s economic recovery may need another boost of European Central Bank stimulus.

A Purchasing Managers’ Index fell to 50.7 from 51.8 in July, London-based Markit Economics said today. While the number remains above 50, indicating expansion, it’s less than the Aug. 21 preliminary reading of 50.8. Italian manufacturing unexpectedly shrank last month, while German factory growth was less than initially estimated.

Today’s report comes after ECB President Mario Draghi signaled that the 18-nation economy may need more stimulus to avoid a deflationary spiral. Inflation slowed to a fraction of the ECB’s mandate last month and investor bets on prices have become dislodged — a condition Draghi has previously cited as justification for large-scale asset purchases.

“Euro-zone manufacturers are clearly finding life very difficult at the moment as current heightened geopolitical tensions add uncertainty to still challenging conditions in many countries,” said Howard Archer, an economist at IHS Global Insight in London. While he expects officials to hold fire this week, “it is looking ever more likely that the ECB will ultimately have to undertake some form of QE,” he said.

The euro rose after today’s report and traded at $1.3144 at 11:13 a.m. Frankfurt time, up 0.1 percent today.

Weakening Recoveries

In China, manufacturing slowed more than estimated last month, joining weaker-than-anticipated credit, production and investment data in suggesting the economy is losing momentum.

National PMI data for the euro area signal a broad-based slowdown in the manufacturing recoveries in most member countries. The French gauge showed the sharpest rate of decline since May 2013, while the Italy’s dropped back into contraction following 13 months of expansion, Markit said. Activity weakened in Spain, the Netherlands and Germany.

“Although some growth is better than no growth at all, the braking effect of rising economic and geopolitical uncertainties on manufacturers is becoming more visible,” said Rob Dobson, senior economist at Markit in London. “The slowdown in industry is likely to add further fuel to the fire for analysts expecting additional monetary or fiscal stimulus to be implemented.”

All Instruments

The inflation rate in the euro region fell to 0.3 percent in August, the lowest since October 2009, the European Union’s statistics office said last week, and the unemployment rate remained at 11.5 percent in July, near a record high.

The ECB “will use all the available instruments needed to ensure price stability,” Draghi said at the Federal Reserve Bank of Kansas City’s annual economic symposium last month in Jackson Hole, Wyoming. “We stand ready to adjust our policy stance further.”

Draghi’s comments have raised expectations that the ECB is now closer to quantitative easing, a form of stimulus it has long avoided. The central bank’s 24-member Governing Council will gather in Frankfurt this week and announce its monetary-policy decision on Sept. 4.

The debate about new ECB action comes three months after Draghi announced an historic package of measures including a negative deposit rate and targeted long-term loans for banks.

Former ECB President Jean-Claude Trichet said in an interview with CNBC last week that officials should implement the policies they already announced before putting new measures in place.

A decision on further action will partly hinge on revised forecasts for inflation and economic growth, which the ECB will also publish on Sept. 4.

“It’s no secret that we are seeing somewhat of a downturn in the economy,” Governing Council member Ewald Nowotny said last week in Alpbach, Austria. “We expected an upturn in the euro zone and we do have an upswing — 2014 is better than 2013, but it is weaker than expected.”


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