Euro-area manufacturing recovery being hindered by shrinking activity in France; Markit's final PMI rises to 51.3 in October from 51.1 in September as France's manufacturing output contracts for 20th straight month

Cindy Allen

Cindy Allen

Nov 4, 2013 – Thomson Reuters Corp.

LONDON , November 4, 2013 () – * Euro zone recovery spreading but French factory output still contracting

* Robust gains seen in struggling countries

* Inflationary pressures remain weak

The euro zone economic recovery that began in Germany has spread to some smaller members but shrinking French manufacturing is hampering a more robust rebound.

Business surveys released on Monday showed factory production in the 17-nation bloc accelerated as expected in October, getting close to August's 26-month high, but still weak compared with historical levels.

Markit's final Manufacturing Purchasing Managers' Index (PMI) rose to 51.3 in October from 51.1, in line with an earlier flash reading and with the consensus forecast of economists. It hit a 26-month high of 51.4 in August.

But Germany and France, the bloc's two biggest economies, went in opposite directions.

Germany showed activity picked up last month, with its index rising to 51.7 from 51.1. In France manufacturing activity shrank to 49.1, its 20th month below the 50 market that divides growth and contraction.

Trouble spots Spain and Italy also diverged, with both growing but the latter at a slower pace than previously.

The lack of substantial growth overall, and with prices barely rising last month, has heightened some expectations the European Central Bank will cut interest rates from already record lows when it meets later this week.

An index measuring output, which feeds into a composite PMI due on Wednesday that provides a good indicator of overall growth, rose to 52.9 from 52.2.

"On past performance it is still only consistent with pretty weak industrial production growth. It's rising - but it's hardly at booming levels," said Ben May at Capital Economics.

Healthy growth in Germany, Europe's biggest economy, pulled the troubled region out of its longest recession in the second quarter, but it will probably only grow 0.2-0.3 percent each quarter through to the end of next year, according to Reuters polls.

France, the euro zone's second-largest economy, shook off a shallow recession in the second quarter with better-than-expected growth of 0.5 percent, but French national statistics office Insee forecasts a flat third quarter.

"The GDP figures for the second quarter certainly overstate the underlying pace of growth in France and these latest numbers underline the point that is not in the midst of a strong and sustained recovery," May said.

Still, euro zone sentiment unexpectedly rose in November, jumping to its highest since May 2011 after a blip in October due to the U.S. fiscal crisis, a survey by research group Sentix showed on Monday.

INFLATION PRESSURES WEAK

Demand for manufactured goods increased last month, although not as fast as in September, and factories made little change to prices, despite rising input costs.

The output prices sub-index nudged up to an 18-month high of 50.5 from 50.3 but was down from the 50.7 flash reading.

Euro zone inflation fell to just 0.7 percent in October, official data showed last week, well short of the European Central Bank's goal of just under two percent.

While a Reuters poll last week did not predict a cut in interest rates from their record low of 0.5 percent when the Governing Council meets this week, Thursday's inflation data prompted some economists to forecast a cut.

"We don't anticipate any policy move from the ECB at the November meeting," said Annalisa Piazza at Newedge Strategy.

"However, we see increasing risks that the ECB might cut its refinancing rate by 25 basis points at the December meeting and further liquidity injections cannot be ruled out in early 2014."

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