Eurozone manufacturing reaches safer grounds as it teeters on the edge of recession

Posted on 24 Jan 2012

Manufacturing output levels across the eurozone reached a six-month high during January, a sign that a slide into recession may be avoided.

The output index, Markit’s purchasing managers index (PMI) that measures the level of growth across 4,500 companies in the eurozone, has now risen for three successive months, levelling out at 50.0.

Despite a poor final quarter in 2011, this figure means that there has been no change in manufacturing output levels during January, signalling that the sector has stabilised.

This suggests that the rate of contraction may have peaked back in October 2011. Led by a resurgent manufacturing sector in Germany, which saw its largest increase for seven months, output continued to fall across the rest of the region as a whole but was the smallest contraction for four months.

Incoming new business continued to fall, although the rates of decline eased to a six-month low in manufacturing. Goods producers also reported the smallest drop in new export orders for six months.

With inflows of new orders continuing to deteriorate, backlogs of work fell across the region for the seventh successive month. The overall fall was the smallest for four months, but nonetheless sufficient to lead firms to cut employment for the first time since April 2010. The decline in jobs was driven by services, as manufacturing headcounts rose slightly on average.

Manufacturers raised the price of their goods, which reflected the need to pass on higher input costs as the price of raw materials continued to rise.

The forward-looking orders-to-inventory ratio remained low compared with the survey’s long-run average, but rose in January to hit a seven-month high.

Commenting on the flash PMI data, Chris Williamson, chief economist at Markit said: “The Eurozone economy appears to have stabilised in January, showing a marginal increase after a 0.5-0.6% contraction in gross domestic product in the final quarter of last year.”

Mr Williamson added: “However, we remain cautious about the improvement. Inflows of new business continued to fall, meaning the marginal increase in output seen in January was the result of firms eating into their backlogs of orders.”

Williamson concluded that companies have entered a challenging-looking 2012 with a focus on cutting costs and boosting productivity.