Shaky recovery signs for European manufacturing as Iraq war looms

LONDON (Reuters) – A recovery in demand lifted some of the gloom in eurozone manufacturing last month, but overall the sector still shrank and raw material costs jumped, a survey of 2,500 companies showed yesterday. The Reuters Eurozone Purchasing Managers’ Index (PMI) rose to 49.3 from 48.4 in December, still below the 50 level that divides growth from shrinkage but above the consensus forecast of 48.6. «All the major (eurozone) economies look like they’re improving, helped by a resumption of orders,» said Ken Wattret at BNP Paribas in London. «So perhaps we’re beginning to see the first signs that the manufacturing sector has bottomed out. The problem is geopolitical concerns may get in the way of a further recovery in the next few months.» An equivalent survey of US manufacturers, compiled by the Institute of Supply Management, was due later yesterday and is forecast to slip to 53.7 from a revised 55.2 in December. The eurozone new orders index jumped to 51.0 in January, its highest since last August, from 49.3, as companies in the eurozone reported growing demand at home and abroad. Greece’s PMI index rose to 53.1 in January from 52.1 in December, reflecting a pickup in the rate of manufacturing expansion, NTC Research, which compiles the survey, said yesterday. «Greek manufacturing expanded for another month in January, continuing the trend of improving business conditions in the sector that registered in all the months, bar one, since the beginning of the study in May 1999,» NTC Research said. Italian companies linked healthier order books to new product launches and improved business conditions, while demand grew in France and Germany, but only marginally. German companies said the main boost to order books came from new exports as foreign manufacturers built up stocks to guard against price rises and supply shortages in the event of war with Iraq. The threat of an imminent US-led war on Iraq has kept domestic consumer demand subdued in the eurozone, but it has also raised the cost of energy and other raw materials. The eurozone index of input prices leapt last month to 55.2, its highest since last August, from 51.2 in December in its biggest monthly jump for nine months. Gloom and uncertainty about global economic prospects and the need to cut costs also prompted companies to shed jobs for the 20th month running, but at a slower pace. The unemployment index rose to 46.3 in January from 45.5. Economists say the eurozone survey, which has been going on for more than five years and covers about 92 percent of manufacturing activity, offers timely signals on output and economic growth. The overall survey is unlikely to undermine expectations that the European Central Bank will soon cut the benchmark refinancing rate, currently at 2.75 percent. «It’s still consistent with a relatively poor performance for the real economy, so the pressure to lower interest rates is still very strong,» said Wattret. The Italian PMI rose to 51.4 from 51.1 in December and the French PMI at 50.0 from 48.7 showed recovery, but not growth. The German PMI was also higher at 48.3 in January from 47.0.