Factories Slashing Prices Toughens Draghi’s Deflation Battle

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By Alessandro Speciale

Euro-area factories cut prices in September by the most in more than a year and German manufacturing shrank, underlining the mounting challenge facing Mario Draghi.

The European Central Bank president is on a mission to avert deflation as the euro region’s economic landscape deteriorates. Purchasing Managers’ Indexes from Markit Economics showed manufacturing activity also contracted in France, Austria and Greece, with a gauge for the 18-nation region pointing to almost stagnant output.

As the euro area’s economic weakness spreads to countries in the region’s core, the ECB will face increased scrutiny tomorrow when it unveils details of an asset-purchase plan. The fresh round of stimulus comes against a backdrop of weak inflation and stuttering growth, with geopolitical uncertainty and high unemployment weighing on confidence and demand.

“ It is very hard to put any positive spin” on the data, said Howard Archer, chief European economist at IHS Global Insight in London. “Clutching at straws, the best that can be said is that it indicates that the manufacturing sector is still growing.”

Euro-area manufacturing expanded at the slowest pace in 14 months, according to today’s report. The gauge stood at 50.3 in September, just above the 50 mark that divides expansion from contraction, and below a preliminary estimate of 50.5.

The euro slid after the German report and extended its decline after euro-area data were published. It was down 0.3 percent at $1.2593 at 10:30 a.m. Frankfurt time.

‘Gloomy Reading’

Today’s PMI data make for a “gloomy reading,” said Chris Williamson, chief economist at Markit in London. “The weakening manufacturing sector will intensify pressure on the ECB to do more to revive the economy and no doubt strengthen calls for full-scale quantitative easing.”

A manufacturing gauge for Germany, once Europe’s export-led powerhouse economy, slid to 49.9 last month, the lowest level in 15 months, with new orders falling at the fastest pace since 2012. By contrast, factory activity in Italy returned to growth, with expansions also registered in Spain, the Netherlands and Ireland.

In the euro area, new orders fell for the first time since June 2013 due to weak domestic demand and waning exports, Markit said, casting doubt on forecasts that the industry will pick up toward the end of the year.

‘Negative Momentum’

There’s “negative momentum in manufacturing activity, especially in Germany where the pace of slowdown is rather pronounced,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “The data flags clear downside risks to the ECB staff’s growth forecast.”

Last month, the ECB predicted economic growth of 0.9 percent this year, followed by expansions of 1.6 percent and 1.9 percent in 2015 and 2016, respectively.

Companies are trying to compensate weak demand by charging less. Output prices in the region fell for the first time in five months, according to the report, adding oil to the fire for investors betting on a worsening inflation outlook.

Euro-area consumer prices rose a mere 0.3 percent on the year in September, while unemployment remained at 11.5 percent in August, close to a record high. Growth in the region ground to a halt in the second quarter and sentiment indicators have deteriorated since escalating sanctions between the European Union and Russia have threatened to harm international trade.

“The euro area’s manufacturing economy has lost the growth momentum seen earlier in the year, lurching closer to stagnation,” Williamson said. “Output could start to fall as we move into the final quarter of the year.”

To contact the reporter on this story: Alessandro Speciale in Frankfurt at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Jana Randow, Paul Gordon

 

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